The ITR filing season has set in. This is the first year to choose, between the old tax regime with deductions and exemption and new tax regime without deductions and exemption but with lower slab rates, while filing your ITR. And if you are wondering how to go about figuring out whether you should opt for the new or the old tax regime, this article answers that question for you. Let us broadly discuss the features of both the regime.
Old Tax Regime – High Rates but Lot of Options to Reduce Taxes
The current tax system is complicated to say the least. While the tax rates are high, there are a lot of ways to reduce your tax liability.
Over the years the government, through addition of clauses to the Income Tax Act, has given Indian taxpayers over 70 exemptions and deduction options through which they can bring down their taxable income and hence pay less.
While exemptions are part of your salary, like the House Rent Allowance (HRA) and Leave Travel Allowance (LTA), deductions allow you to lower your tax amount by investing, saving or spending on specific items. The biggest section for deduction is Section 80c through which you can bring down your taxable income by Rs.1.5 lakh. Apart from this, there are several other sections that let you take tax deductions on things ranging from interest on your loans (home and education) to premiums you pay for health insurance.
Most common exemptions and deductions availed by Indian taxpayers
House Rent Allowance
Public Provident Fund
Leave Travel Allowance
ELSS (Equity Linked Saving Scheme)
Mobile and Internet Reimbursement
Employee Provident Fund
Food Coupons or Vouchers
Life Insurance Premium
Company Leased Car
Principal and Interest component of Home Loan
Children Tuition Fees
Health Insurance Premiums
Investment in NPS
Tuition fee for Children
Saving Account Interest
The combination of exemptions and deductions can bring down your taxable income by lakhs. However, it also means every year you have to find ways to optimize your salary and savings/investments so as to keep you taxable income at the minimum level.
New tax regime – More slabs, lower tax rate but no way to reduce taxes
The new tax regime is different from the the old tax regime in two aspects.
One, in the new regime, the number of tax slabs have increased, accompanied by lowering of rates in the sub-Rs. 15 lakh range. Two, all the exemptions and deductions that were being used by taxpayers in the existing regime won’t be available in the new regime.
Here is a comparison between the old and new tax slabs
|TAX SLAB (RS.)||OLD TAX RATES||NEW TAX RATES|
|0 – 2,50,000||0%||0%|
2,50,000 – 5,00,000
|5,00,000 – 7,50,000||20%||10%|
|7,50,000 – 10,00,000||20%||15%|
|10,00,000 – 12,50,000||30%||20%|
|12,50,000 – 15,00,000||30%||25%|
|15,00,000 & above||30%||30%|
As you can see under the new system, income between Rs. 5 lakh and Rs. 7.5 lakh would be taxed at 10 percent, while income between Rs. 7.5 lakh to Rs. 10 lakh would be taxed at 15 percent. This was 20 percent flat on the entire range for the existing regime. The earlier Rs. 10 lakh+ slab where you paid 30 percent, has been broken into three parts with rates of 20 percent for Rs. 10-12.5 lakh, 25 percent for Rs. 12.5 lakh-15 lakh and then 30 percent for Rs. 15 lakh and above.
Old vs. New Tax Regime: Which One Should You Pick?
Unfortunately, there is no single answer to this. And the culprit again is the complexity of the Indian tax rules.
Although looking at the reduction in the tax rates, the first reaction would be that the new system looks better. However, with these cuts, someone with Rs. 7.5 lakh income will have to pay Rs. 25,000 and for those who are earning Rs 10 lakh income, the tax saving will be Rs. 37,500. But as they say, the devil lies in the detail. For these savings, you will have to let go all the exemptions and deductions which might nullify these gains.
While figuring out whether to choose the old or the new tax regime might look complicated, if you approach it in a systematic way, it is not that difficult to figure out.
Here is what you need to do –
- Calculate all the exemptions that you are availing: If you are living on rent, you would be claiming HRA which is the biggest salary exemption one enjoys. Apart from that, other tax-free components include LTA, Food Bill, Phone Bills, etc. All these will become taxable if you choose to shift to the new tax regime.
- Look at the deductions that you claim: As a salaried employee, two deductions that you automatically get are standard deduction of Rs 50,000 and your contribution towards your Employee Provident Fund (EPF). In the new regime, you won’t be able to claim these deductions even though you will continue to contribute to EPF. Over and above, you cannot claim deductions against your home loan (if you have one) or insurance policies, which till now has helped to reduce your taxable income.
Now, combine these exemptions and deductions and minus them from your salary to see what is your taxable income and what it would be if you let go of these deductions. This should be the deciding factor for which regime you should go for.
As we said in the beginning, the changes introduced don’t really make things easier for Indian taxpayers. However, there is one thing you need to be careful about. Whether you pick the new or old tax regime shouldn’t decide if you should invest and get insurance. Achieving your life goals and securing your family’s future should be the reasons driving your decision to invest and purchase insurance, not the tax benefits you get from them.
Posted by Pooja