Summary: The new tax regime offers lower tax slabs. But many deductions and exemptions available in the old tax regime cannot be availed of. In the new regime, you will have the freedom to invest in any instruments without worrying about tax benefits. But the old regime offers for systematic saving and investment and you can take advantage of many exemptions. Check your income, the various deductions and exemptions that you avail of. If they are important for your financial plan, stick with the old regime. You might save some more cash if you pay less tax but will lose out on investments and the returns on them.
As per Budget 2020, taxpayers have two options –
Continue with the old regime and pay tax at the existing rates, or
Move to the new tax regime. It contains seven slabs with lower tax rates up to the taxable income of ₹15,00,000 but the following deductions from gross income cannot be availed of –
Continue with the old regime and pay tax at the existing rates, or
Move to the new tax regime. It contains seven slabs with lower tax rates up to the taxable income of ₹15,00,000 but the following deductions from gross income cannot be availed of –
- House Rent Allowance (HRA)
- Standard Deduction
- Exemption u/s 80C
- Exemption u/s 80D
- Tax rebate u/s 87A
- Deduction on Home Loan interest
- Additional deduction on Home Loan interest on affordable houses u/s 80EEA
- Deduction on Auto Loan interest for purchase of electric vehicle u/s 80EEB
Let us look at some examples to find out the tax outgo for salaried individuals in both regimes –
An individual (not a senior citizen) earns a salary of ₹8,00,000. He does not earn any other income. He does not make investments in tax-saving instruments.
He pays less tax under the new tax regime.
In the example below, the individual earns ₹ 16,00,000.
In the example below, the individual earns ₹ 16,00,000.
Here, he makes enough tax-saving investments and takes advantage of relevant exemptions and therefore pays less tax under the old regime.
But if his total deductions are 3,00,000, then the tax payable under the old regime would be ₹ 2,10,600 which is the same as the tax under the new regime. On the other hand, if the deductions and exemptions availed are only ₹ 2,50,000, then the tax under the old regime would be ₹ 2,26,200 which is higher than the tax as per the new regime. But then the individual is foregoing investments and the returns on them. This negates the cash gains made.
But if his total deductions are 3,00,000, then the tax payable under the old regime would be ₹ 2,10,600 which is the same as the tax under the new regime. On the other hand, if the deductions and exemptions availed are only ₹ 2,50,000, then the tax under the old regime would be ₹ 2,26,200 which is higher than the tax as per the new regime. But then the individual is foregoing investments and the returns on them. This negates the cash gains made.
Some points to remember while filing taxes this year –
- The new regime provides for concessional tax rates compared to tax rates in the old regime. Fewer exemptions and deductions means lesser documentation while filing taxes. Some people may not find the investments that allow for deductions as the most optimum. Others may not need to avail of the exemptions. The new tax regime gives flexibility in these cases.
- On the other hand, the old regime inculcates a savings culture. People can invest in products that allow for building wealth and earning returns on investments. With lower taxes and fewer mandatory investments, people will have more money in their hands under the new tax regime. This can lead to unnecessary spending.
Do remember your financial goals and the different variables involved while choosing between the new tax regime or the old tax regime.
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