Old Or New Regime
NEW TAX REGIME OR OLD-WHICH ONE SHOULD YOU PICK?
The Budget 2020 saw the finance minister introduce a new Tax regime with more tax slabs and lower tax rates. This was much awaited and demanded by the taxpayers, but it camewith a catch of removal of all the deductions and exemptions available.
To add further confusion to this, the finance minister gave taxpayers a choice between the new regime and the existing one, leaving it to them to decide which one they would like to opt for. All of these changes put together, instead of tax laws getting simpler, they are now even more confusing.
And if you are wondering which regime to opt for this blog will help you understand the technicalities and answers the question for you. For this we will look into the new regime in detail, its benefits and compare it to the existing tax system. So, let’s start.
CURRENT TAX SYSTEM- Higher 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 has provided a total of 70 deductions and exemptions through which a taxpayer can reduce his tax liability.
Following are the important exemptions that are part of taxpayer’s salary:
- If the taxpayer is staying in a rented premise, he has an exemption of House Rent Allowance (HRA).
- Leave Travel Allowance, Entertainment Allowance and Professional Tax
There are various deductions that help taxpayers reduce their tax liability by way of investing and spending on specific terms. The biggest and the most common section for deduction that can be availed by every tax payer is Section 80C, which can bring down your tax liability by Rs 1.5 lakh. Apart from this, there are several other deductions ranging from interest on your loans (Home & Education), medical insurance premium, house rent.
The combination of these exemptions and deductions can bring down your taxable income by lakhs but this also means every year you have to find ways of to optimise your income and investments in a way to keep your taxable income at the bare minimum.
NEW TAX REGIME- More slabs, Lower tax rates but no way to reduce taxes.
The new tax regime is different from the current one in two aspects. One, the new regime has more tax slabs and lower tax rates till the range of 15 lakh. Two, all the exemptions and deductions that were being used by taxpayers to reduce their tax liability cannot be availed anymore.
Below is a comparison between the old and new tax slabs.
| Tax Slab | Old Tax Rate | New Tax Rate |
|---|---|---|
| 0 – 2,50,000 | – | – |
| 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% |
So Which regime should one pick?
Unfortunately, there is no single answer to this. There is a right answer but it is different for everyone and the culprit for the same is the complex Indian Tax Laws.
The first reaction would be selecting the new regime after having a look at the lower tax rates. But as they say the devil lies in detail.
While figuring out which tax system to go for might be confusing but if you approach it in an orderly way, it is not that difficult.
Here is what you need to do.
- Calculate all the exemptions that you are eligible for and are availing- HRA, LTA, Food coupons, Profession Tax etc. All this will become taxable if you choose to shift to the new regime.
- Look at your deductions- As a salaried employee you get two automatic deductions that are standard deduction of Rs 50,000/- and contribution towards EPF (Provident Fund). In the new regime you can’t claim these but you will still be contributing towards your EPF, and will not be able to claim other deductions such as principal and interest on Home loan, life insurance premium and other deductions under Chapter VIA.
Now combine these exemptions and deductions and reduce the amount from your salary to see what is your net taxable income and what it would be if you let go of these two amounts. This should be the deciding factor for your decision.
We are going to give you an example of the same at the range of 15 Lakh.
| Tax Slab | Old Rates | New Rates | Tax (Old) | Tax (New) |
|---|---|---|---|---|
| 0-2,50,000 | – | – | – | – |
| 2,50,000-5,00,000 | 5% | 5% | 12,500 | 12,500 |
| 5,00,000-7,50,000 | 20% | 10% | 50,000 | 25,000 |
| 7,50,000-10,00,000 | 20% | 15% | 50,000 | 37,500 |
| 10,00,000-12,50,000 | 30% | 20% | 50,250 | 50,000 |
| 12,50,000-15,00,000 | 30% | 25% | – | 62,500 |
| Total Tax | – | – | 1,62,750 | 1,87,500 |
| Cess | – | – | 6,510 | 7,500 |
| Total tax payable | – | – | 1,69,260 | 1,95,000 |
As you can there is a tax saving of Rs 25,740/- if you select the current tax system and avail all deduction, in our example we considered maximum deductions a person can avail, but what about those who don’t or can’t avail all available deductions then our Taxology is that if no deductions then select the new regime as that is more beneficial.
So, what is the bottom line?
As we said in the beginning, the changes introduced have just complicated things for Indian tax payers. However, there is one thing you should keep in mind, the regime you select should not decide the investments you make or the insurance you take. Achieving your life goals and a secure future should come first and the not tax benefit from it since that is just an added benefit.