Old Versus New Income Tax Regime: Which is better for Your Needs?
Be careful what you wish for, because it might just come true! This is what exactly has happened to the Indian taxpayers.
People in India have been demanding a simplified tax regime with liberal and lower rates for a long time. In Union Budget 2020, Finance Minister Nirmala Sitharaman has acceded to the demand, but with a condition. If you want to have a simple tax structure, you will have to go through a lot of exemptions and deductions.
The budget 2020 has given taxpayers the option to choose between the existing income tax regime and a new tax regime with slashed income tax rates and new income tax slabs but no tax exemptions and deductions. It is to be noted that once you opt the option for a new tax regime, it will remain valid for subsequent years.
The new tax regime provides you lower tax rates and new tax slabs and at the same time, it removes tax exemptions. During her budget speech, the finance ministers claimed that those with INR 15 lakh income will save INR 78,000 in taxes and those with lower incomes will get profit with new lower tax rates. But if you look deeply it may not be completely true.
The new tax regime brings 70 deductions and exemptions. It includes standards deductions of INR 50,000 available to all salaried individuals without the need to invest and up to INR 1.5 lakh deduction on mandatory contributions to EPF (Employees’ Provident Fund) for most salaried people.
Under the new tax proposal, people with an annual income of up to 2.5 lakh will not have to pay any tax.
For income between 2.5 lakh to 5 lakh, the tax rate will be 5% (as earlier).
Those with an income of 5 lakh to 7.5 lakh will have to pay a reduced tax rate of 10 percent.
Taxpayers in the higher income brackets of INR 10 lakh or more have higher disposable income so they can claim more deductions apart from Section 80C and standard deduction. Up to INR 50,000 for contributions to National Pension Scheme, premiums up to INR 25,000 for a health insurance policy, HRA or up to INRO 3 lakh and deduction of up to INR 2 lakh on home loan interest are some additional deductions that people can get.
Overall, the budget pitch of lower tax rates under the new regime is just eyewash. With all the major deductions removed, the next taxable income will go up and come close to gross earning.
Follow the Old or Adopt the New One
Actually, the fact is that there is no single answer to the switch or stick. And it just does not depend on your income or salary structure. But you need to check your investment habits, your age, duties, goals, and expenses. You will also have to check your actual income and deduction figures to decide whether to switch or not.
Like, if you are a young individual and want to get rid of paperwork and see no tax-saver benefits in the old tax regime, you can think about switching. Forgoing these tax advantages to make sure more money in your hands will not be a tough task to select. But here, if you take multiple tax breaks, the older regime is a good choice to save more on taxes.
Taxpayers with business class do not get as many tax deductions and exemptions as salaried individuals. Because two major advantages of INR 50,000 standard deduction and HRA are not available to business class, raising their tax liability to as much as twice of their salaried counterparts.
Moreover, as the gross income of non-salaried people increases, their tax outgo under the existing tax regime will also go up. All in all, non-salaried people can get benefit from the new tax regime.
Senior citizens aged above 60 survive mainly on interest income or gains from funds. Re-investing their income to claim 80C benefits will broadly disrupt their cash flow. A senior citizen having the annual income to INR 15 lakh will pay the same tax of around INR 1.95 lakh under both new and old regimes.
But in the existing tax regime, he will have to invest worth INR 2.5 to achieve tax outgo of INR 1.95 lakh, whereas under the new regime he can pay the same tax without any investment. The new tax regime will mainly benefit those senior citizens who have higher incomes of INR 8 lakh or more.