The Budget has proposed a New income Tax Regime in addition to the existing, i.e. Old Tax Regime. However, the New Tax Regime is optional. To put it simply, the Assessee can choose between the New Tax Regime and the Old Tax Regime depending on what is best suitable from a tax planning point of view. The difference in the tax rate in the old regime and new regime is as under:
|Income slabs (RS)||Tax Rate(Old Regime)||Tax Rate (New Regime)|
|Up to 2.5 lakh||NIL||NIL|
|Above 15 lakh||30%||30%.|
The old regime has just 3 applicable tax rates of 5%, 20% & 30%, as against 6 rates of tax under the new tax regime. Under the new tax regime, concessional tax rates are proposed for taxpayers earning income up to Rs. 15 Lakh. Income above Rs. 15 Lakh is unaffected whether it’s a new tax regime or an old tax regime.
The new tax regime requires taxpayers to forgo most of the exemptions & deductions and so taxpayers are in the dilemma of making the right choice.
Common question is – which tax regime is better – Old tax regime with higher tax rate offering exemption & deductions or the new concessional tax rate regime without any exemptions & deductions?
Let us first compare the tax liability without any deductions & exemptions on income at every peak point of income slab in case of individual & HUF taxpayer (who is not a senior citizen & not salaried taxpayers):
|Income of the Individual||Tax in Old Regime*||Income Tax in New Regime*||Tax Saving|
|RS. 2.50 Lakh||0||0|
|RS. 5 Lakh||12500||12500||0|
|RS. 7.50 Lakh||62500||37500||25,000|
|RS. 10 Lakh||1,12,500||75,000||37,500|
|RS. 12.50 Lakh||1,87,500||1,25,000||62,500|
|RS. 15 Lakh||2,62,500||1,87,500||75,000|
(In New Income Tax regime, Tax slab rates are the same for all individuals including senior citizens and Very Senior citizens)
On the face of it, a new regime displays net savings in tax but it may not be positive for all taxpayers with exemptions and deductions. To arrive at the right choice, taxpayers need to work out the break-even point of deductions and exemptions where the tax liability under the old regime and the new regime will be the same. It can be arrived at by summing up all deductions and exemptions which the taxpayer intends to use. So long as the amount of deduction & exemption exceeds the break-even point, staying in the old regime would be advisable.
Though the new tax regime is simple to follow, yet it will be worthwhile to do the mathematics before opting for it. The million-dollar question is how should taxpayers make this choice? Both regimes have their own sets of pros and cons. The choice would necessarily dependant on:
- > Income slab of every individual.
- > The extent of exemptions and deduction available with the taxpayers.
- > Alternate investment options & returns thereon if taxpayers prefer not to opt for the new regime.
- > Short term and long term financial goals of the taxpayers.
With the above background, the following observation can further help a taxpayer in arriving at a better conclusion:
1. Many senior citizens may not be taking any tax breaks available under section 80C, 80D, or Housing loan interest. In such cases, it would always be advisable to opt for the new tax regime as it would entail a lower tax burden on them.
2. For taxpayers who have higher family or personal commitment and finding it difficult to save & invest money adequately, the new tax regime would be a boon for them. Similar will be the case of individuals who don’t have commensurate exemptions/ deductions.
3. A taxpayer without any business income will have a free entry & exit option in the new regime. However, in the case of a taxpayer with business income, the free entry & exit option is not there. Such business assessee has to make a choice of preferred tax regime before filing an income tax return. The option once chosen cannot be withdrawn except on one subsequent occasion.
4. Taxpayers with income up to Rs 5 lakh without any deduction and housing loan interest will not be liable for tax as assessee can take benefit of Rebate u/s 87A.
5. Taxpayers with income up to Rs. 7.50 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of just Rs. 2 Lakh may find it relevant to stay in the old tax regime.
6. Taxpayers with income in the range of Rs. 7.50 Lakh to Rs. 10 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of more than Rs. 2.50 Lakh may find it relevant to stay in the old tax regime.
7. Taxpayers with income in the range of Rs. 10 Lakh to Rs. 12.50 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of more than Rs. 2.25 Lakh may find it relevant to stay in the old tax regime.
8. Taxpayers with income in the range of Rs. 12.50 Lakh to Rs. 15 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of more than Rs. 3 Lakh may find it relevant to stay in the old tax regime.
NOTE: IF THERE IS NO HOUSING LOAN DEDUCTION THEN THE TAXPAYERS WITH ANY INCOME SLAB WOULD BE ADVISABLE TO OPT FOR NEW TAX REGIME.
One needs to calculate the total income tax under old as well as the new regime individually. So long as the benefit of exemptions and deduction is more than the impact of higher tax rates under the old tax regime, it would be advisable not to opt for the new tax regime but continue with the old tax regime.
It makes sense to evaluate before taking a final call. To be more specific, if any taxpayer has an admissible deduction & exemptions of more than Rs. 3 Lakh then it will generally be advisable for such taxpayers to remain in the old tax regime irrespective of their income slab.
Note: “This document had been written to provide update in simple/ lucid language. The Author shall not be responsible for any decision made based on the content of this document. Care has been taken to produce authentic and reliable information, however the users are expected to obtain professional advice before implementing.