Introduction
One of the common questions these days is which tax slab is better – the old regime or the new? E filing of income tax return comes at a later stage; first comes the stage where taxpayers need to select between one of the two available regimes. Both regimes have advantages and disadvantages, and which one will be better will depend on many factors.
Let’s get started to understand each tax regime.
Everything You Should Know About New Tax Regime
The Indian government introduced a new optional tax regime for all individuals and HUFs effective 1st April 2020. Section 115 BAC was added to the Income tax act of 1961, which stated lower tax rates for people who do not take specific tax exemptions or deductions. As for the current budget, the default option for every taxpayer will be the new tax regime, and they can decide to choose the old one at the beginning of the financial year.
But, people who go with the new tax regime will not have the option of various deductions and exemptions such as LTA, HRA, 80D, 80C, etc. A few things offered under the new tax regime are:
- The government has introduced a total tax rebate of up to Rs. 7 lakhs which was Rs. 5 lakhs in the old regime. It means people up to the income of Rs. 7 lakhs will not have to pay any taxes, and if there are any deducted by the employer, they can claim during the e-filing of the income tax return.
- The tax slabs are more simple than the old regime. The tax exemption limit currently is Rs. 3 lakhs, and even though the percentage is 30% above Rs. 15 lakhs, there are more salary brackets with lesser tax percentages in the new regime.
- The standard deduction of Rs. 50,000 has also been introduced to the new regime, making the total tax-free income Rs. 7.5 lakhs.
- People receiving family pensions are eligible for Rs. 15,000 or 1/3rd of the pension deduction, whichever is lower.
- The surcharge has been brought down to 25% from 37% on income over Rs. 5 crores.
- For all non-government employees, the leave encashment exemption has increased to Rs. 25 lakhs from Rs. 3 lakhs.
What is the Old Tax Regime?
A lot of confusion regarding the new and old tax regimes is there, and people often need help deciding which one will be better. The tax system you have seen to date is known as the old regime. Around 70 deductions and exclusions are offered under the old tax system to taxpayers. These help in reducing the taxable income and tax burden.
The most important of all is section 80C which is no longer there for people who chose to go with the new tax slab. Under this section, a taxpayer can avail deductions and exemptions of up to Rs. 1.5 lakhs. You can always refer to an online tax consultant to discuss which tax regime will be better for you.
Some of the exemptions under the old tax regime are:
- LTA
- HRA
- Standard Rs. 50,000 deduction for salaried people
- Deductions available under sections 80TTA and 80TTB
- Entertainment allowance and professional tax for government employees
- Tax relief on home loan interest for self-use or vacant property.
- Deduction of Rs. 15,000 from the family pension
- Tax-saving investments such as LIC, ELSS, PPF, NPS, and other insurance premiums
Which One Should You Go With?
Whether an individual prefers to go with the old or the new tax regime is a personal choice which they can make depending on their tax saving exemptions and deductions. A few things that can be considered are:
- If your total tax deductions are less than Rs. 1.5 lakhs, the new tax system will be better.
- The old system will be better if your total tax deductions are more than Rs. 3.75 lakhs.
- If your total deductions are between Rs. 1.5 lakh and Rs. 3.75 lakhs, decide based on your income slab.
Final Thoughts
New and old tax regimes have benefits and drawbacks, and one should clearly understand both tax slabs to choose the best one for themselves. With the help of online tax calculators, you can determine the amount to be paid under each regime while e-filing of the income tax return. Once you have the amount, you can better decide which will help you save more.
