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.
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.
EXEMPTIONS | DEDUCTIONS |
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 |
Standard Deduction | Children Tuition Fees |
Uniform Allowance | Health Insurance Premiums |
Leave Encashment | Investment in NPS |
Tuition fee for Children | |
Saving Account Interest |
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.
TAX SLAB (RS.) | OLD TAX RATES | NEW TAX RATES |
0 – 2,50,000 | 0% | 0% |
2,50,000 – 5,00,000 | 5% | 5% |
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% |
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 –
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.