Old vs New Tax regime: Tax Planning for 2023-24

If you’re a salaried employee then you’ve probably only recovered from the dilemma of old vs new tax regime and the process of collecting all the bills and proofs of investment to submit to your employer for the financial year that will end on March 31, 2023. So if you’re wondering why we are telling you about tax planning for FY 24 when you’ve only just emerged from under a small mountain of rent receipts and pharmacy bills – it is precisely to avoid the mad scramble that inevitably accompanies tax related deadlines that we advocate planning for taxes from right at the start of the financial year. 

This gets even more important with several important changes proposed by Budget 2023 coming into force in FY 24. 

In this article we will cover: 

• the key changes proposed by Budget 2023 that you should be aware of in your tax planning,
• what you are giving up under the ‘New Tax regime’’
• re-examining the role of ‘tax-saving’ investments in your portfolio and 
• the all-important question of old vs new tax regime

Budget 2023

Budget 2023 made several announcements that directly affect your taxes and therefore tax planning. Most changes are geared towards making the new tax regime far more attractive than the old regime. The key changes that make a difference are:

• Availability of standard deduction of Rs. 50,000 in the new regime as well. This was earlier available only under the old tax regime.
• Increasing the maximum limit for rebate under section 87 A to Rs. 25,000 under the new regime which means that if your taxable income is Rs. 7 lakhs or under, you don’t pay taxes. This limit was and continues to be Rs. 5 lakhs under the old regime. 
• Reduction in surcharge rate for the highest income earners with the highest surcharge rate now being 25% under the new tax regime as against 37% before.
• A reduction in the number of slabs under the new regime
• A cap on the deduction one can claim under sections 54 and 54F to Rs. 10 crores which means high net worth assessees will have to rethink purchase of ultra-luxury residences. 

You can read about these changes in more detail in our earlier article that covered the key announcements made under Budget 2023.

What you forego in the ‘New Tax regime’

The new tax regime was introduced in 2020 and took effect from FY 21. This new tax regime offers a simpler and friendlier tax structure if you forego most deductions under Chapter VIA of the Income Tax Act. You also have to give up exemptions with respect to travel concession and HRA among others.

So what do you lose in the new tax regime? Here is a quick recap of the main exemptions and deductions:

How to approach tax planning now - old vs new tax regime

When it comes to your taxes for the year, therefore, the tax changes need you to assess your expenses, investments, and income to work out which tax regime would be more beneficial to you. It’s also been announced that the new tax regime will be the default. 

It’s important to give this some thought before the start of the financial year. If you are a salaried employee, this could determine the tax that will be deducted from your salary each month even though you have the choice to change your mind when filing your returns. If you have income from business or profession, then you only get limited opportunities (once you choose to opt out of the new regime, you can choose to opt in just once) to switch and so give it very careful thought.

But there is no one-size-fits-all approach to the old vs new regime. The choice will depend on your situation. Here are the main points to consider that could help you in the tax planning process and in deciding which route to take.

• The starting point to making this decision would be to examine if the a few main items deductible under Chapter VIA would anyway apply to you. A key consideration here is your home loan as deductions available on this are big in the old regime and it can be well worth sticking to until the deductions taper off. For those without home loans, the new tax regime may make more sense. 
• Other key deductions are EPF and/or HRA if you are a salaried employee or life insurance premiums. That is, items such as EPF and insurance premium would be part of your investments or expenses no matter which tax regime you choose. If, by claiming these deductions, your taxable income drops below the Rs 5 lakh limit in the old tax regime or your overall tax impact is lower than in the new regime, you can go ahead and stick with it. 
• If you don’t have any of the key deductions mentioned above or the amounts are very low, you may be better off with the new tax regime. You can avoid making unnecessary investments just for the sake of saving on taxes. Given the direction, further incentives under the old tax regime are unlikely to be forthcoming. The next section explains the various items available for deductions and gives you pointers on how to evaluate them based on their individual merit and tax breaks.

You can calculate the tax applicable under the old and new regimes to arrive at which is better. The Income Tax Department has a calculator for just this purpose.  You can also use this simple excel based calculator that we have created in-house (which you would have also seen in our article on Budget 2023) to evaluate which tax regime suits you better.

Re-think ‘tax-saving’ investments

The announcement that the new tax regime will be the default if you don’t make a choice, coupled with the attempts to make the new regime more attractive indicate that it’s time to rethink the tax-saving-above-all angle. We believe that this gives you an opportunity to examine each of these ‘tax-saving’ investments on their own merit to see if they find a place in your portfolio. You can read about this in detail in Vidya Bala’s article ‘Is the Budget 2023 dis-incentivizing savings?’

So, if you don’t have the big home loan expense ticket to claim towards deductions, sit down and evaluate investments (or expenses) that you make just for the sake of tax deductions. These fall under 3 types:

• Must have options: A few are important, on their own merit as well as the tax benefit they offer. For these, regardless of which regime you choose, you should continue to opt for them.
• Useful to have options: A few are useful investments to be making, and the tax benefit is an added advantage. For these, you can check if including them would help reduce taxes in the old regime. Even if not and you opt for the new regime, these investments can continue to be part of your portfolio.
• Skippable options: A few are useful only for the sake of the tax benefits they offer. These can be skipped entirely otherwise. 

The must-have options

These are expenses or investments that we think should still be undertaken regardless of the tax-saving impact.

• Health insurance for you and your family: Tax break or no tax break, health insurance is a must to safeguarding your finances. You can take a look at - Prime Health Insurance - our health insurance recommendations if you are shopping for one.
• Term insurance: A good term insurance cover is essential unless you meet the criteria for someone who does not require life insurance. So unless you meet these criteria, ensure you have adequate life insurance. Take a look at Prime Term Insurance – our term insurance ranking tool and our DIY Term Insurance Selection Tool if you need some help.
• Senior Citizens Savings Scheme: A great option for senior citizens, regardless of tax impact. From FY 24, this scheme will let you deposit up to a maximum of Rs. 30 lakhs into this scheme that is only available to senior citizens. This scheme can be closed or extended after 5 years. Rates for FY 23 for this scheme are 8%. With rates better than most bank FDs combined with risk free status, this scheme can be a part of a senior citizen s portfolio with or without tax benefits.

The nice-to-have options

These are investments that offer merit, even without the tax breaks they otherwise enjoy. As explained above, these can be part of your portfolio with or without the tax breaks. You can also check whether making such investments would mean a lower tax outgo in the old regime, and go for it if so. 

• PPF: PPF is a good option for the non-salaried and those who do not have EPF towards building up their retirement corpus. As of current rules, PPF is tax-exempt at every stage and is low risk, given the sovereign guarantee that it comes with. However, it doesn’t come with guarantee on the rates it offers. PPF rates are announced quarterly. 
• NPS: The NPS is also a good vehicle to save towards retirement. Further, it also boasts of benefits such as low costs, flexible allocations, tax free switches and the ability to generate inflation beating returns. Under the old regime NPS contributions can over and above the 1.5 lakhs under section 80C fetch you an additional deduction of Rs. 50,000, sending your total deduction up to Rs. 2 lakhs. 
• Immediate annuity plans: These plans require a large upfront payment. This may be much higher than the overall limit of Rs. 1.5 lakhs that 80C items fall under and returns are not great, but the advantage of these plans is that they offer a no-fuss way to get regular income and this should be the primary reason one opts for this category of products.  
• NSC: The NSC matures in 5 years with no option to close before that. While interest is compounded annually, it is not paid out but reinvested. Both the initial amount and the interest amounts that are reinvested each year are eligible for deductions. The NSC typically offers good interest rates (Current rate for FY 23 stands at 7%) and for the risk-averse, it can be a good debt portfolio addition.
• Corporate NPS: Employer contribution to corporate NPS is tax deductible under the old and new tax regimes. This is subject to a maximum of 10% of basic + DA in the case of private sector employees and 14% in the case of central Government employees. If the employer contribution exceeds Rs. 7.5 lakhs per annum however, it will be taxed. Being deductible under both old and new regimes makes this an attractive lever to use if you want to bring down taxable income.

The skippable options

All other heads under which you can claim deductions may not really be worth it just for the sake of saving taxes. While you may have invested in these up until now, evaluate whether you really need them in your portfolio.

• ELSS: ELSS funds do deliver, especially when you hold for over 4-5 years. But equity funds outside ELSS are also equally capable substitutes, and most of you would already be holding funds outside of the ELSS list. This apart, ELSS funds typically mirror their flexi-cap counterparts, and given the small amounts you are likely to be investing in these (since the deduction cap is Rs 150,000) including them may not significantly influence your portfolio’s return.
• High-value insurance policies: Gains on high value ULIPs have already started to be taxed for a couple of years now. However, life insurance policies outside of ULIPs were not subject to any such conditions. The Budget 2023 changes this. Starting 1st April 2023, maturity proceeds on non-ULIP life policies issued after 1ist April 2023 will be tax-free only if the yearly premium (aggregate premium if more than one policy) is less than Rs. 5 lakh. With this tax benefit gone, you will have to evaluate if you really need that guaranteed income plan though you may still get 80C benefit for it under the old regime. The insurance cover that you normally get under these products also tend to be inadequate. Keeping insurance and investments separate would be the best approach to take.
• Deferred annuity/pension: These plans require you to commit to fixed premium payments for a fixed duration after which you get regular payouts. These products come with high costs and prioritize safety thereby compromising on returns. These are not really necessary to have in your portfolio. Alternative such as government securities from RBI Retail Direct or RBI Floating Rate bond or even the Post Office Savings schemes may be better alternatives, especially if you are looking for regular cash flows in your later years.  
• Fixed deposits – banks or post office: Tax-saving bank and post office deposits come with long lock-ins and interest is taxable. The low return makes them unattractive, even with tax benefits. These are wholly avoidable – you can go for other bank FDs that give you the freedom to choose those that offer attractive interest rates, if you do necessarily want to include FDs in your portfolio.

Given the direction in which the tax changes are heading, it is clear that the old tax regime will no longer see additional incentives and that the push is towards the new regime. Therefore, don’t entirely bank on the current system continuing and begin adjusting your investment decisions to account for the changes.