In this article, we will be discussing the difference between the old tax regime and the new tax regime that was introduced in the Union Budget for FY 2020-2021. This topic is crucially important for taxpayers in India, as understanding the difference between the two regimes could potentially result in substantial tax benefits. Taxpayers can opt for either of the two tax regimes at the start of a financial year, thus it's relevant to both individual taxpayers and businesses.
Understanding the difference between the old and new tax regime is necessary as it can directly impact your tax liability. The choice between the two regimes should be made after careful comparison considering factors like one's income level and allowable deductions, as each may offer benefits under different circumstances.
Moreover, personal tax planning has a profound impact on an individual's financial planning. For businesses also, the right regime selection may contribute to better financial management and business planning.
This piece of information is crucial for individual taxpayers who are trying to decide the most beneficial regime for them.
Small to medium business owners can also benefit from understanding these comparisons as it will help them in effective tax planning and choosing the most advantageous route for their business.
The old tax regime refers to the older taxation system in India that allows taxpayers to claim several exemptions and deductions under various sections of the Income Tax Act. This includes deductions for paid premiums on life insurance, pension plans, housing loans, savings certificates, health insurance etc.
The new tax regime, on the other hand, offers lower tax rates than the old regime but with a trade-off that many deductions and exemptions available under the old regime are not available under the new regime.
Regardless of the selected tax regime, one must have relevant income proofs, proofs of all investments, home loan certificate, health insurance premium receipts, etc. Documentation for exemptions and deductions are particularly relevant for the old tax regime.
The first step is to fully understand the key differences between the two tax regimes. This involves familiarizing yourself with the deductions and exemptions available and the tax rates applicable under each.
Using this data and your income details, calculate the tax payable under both schemes. There are numerous tax calculators available online to assist with this.
Finally, make a comparison and choose the regime under which you need to pay lesser tax. You can make this choice at the start of every financial year.
Please note that once opted for a tax regime, it's generally not possible to switch to the other in the same financial year. You need to make this decision thoughtfully and after careful comparison.
A common mistake made by taxpayers is not doing a proper comparison and directly opting for the new tax regime because it offers a lower tax rate. Remember, despite the higher tax rate, the old regime might still be more beneficial due to the exemptions and deductions it offers.
Q: Can I change my choice of tax regime during a financial year?
A: Normally, it is not possible to shift from one tax regime to another during the same financial year.
Q: Which tax regime is beneficial for me?
A: The beneficial tax regime differs from person to person. It's always advisable to make a detailed comparison, considering your income, deductions, and exemptions before deciding.
Q: Can I avail deductions under the new tax regime?
A: Most deductions and exemptions are not permitted under the new tax regime. However, a few exceptions like employer contributions to NPS account, employee's contribution to EPF, etc. are allowed.
In conclusion, the new tax regime offers lower tax rates but at the cost of losing many exemptions and deductions. On the other hand, the old tax regime may have higher tax rates but offers the advantage of many exemptions and deductions. Hence, it is essential to carefully evaluate both the regimes to determine which is more beneficial based on your personal financial situation and your long-term financial goals.
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