Old Versus New Income Tax Regime: Which is better for Your Needs?

Old Versus New Income Tax Regime: Which is better for Your Needs?

Old Versus New Income Tax Regime: Which isbetter for Your Needs?

Be careful what you wish for, because itmight just come true! This is what exactly has happened to the Indiantaxpayers.

Peoplein India have been demanding a simplified tax regime with liberal and lowerrates for a long time. In Union Budget 2020, Finance Minister NirmalaSitharaman has acceded to the demand, but with a condition. If you want to havea simple tax structure, you will have to go through a lot of exemptions anddeductions.

Thebudget 2020 has given taxpayers the option to choose between the existingincome tax regime and a new tax regime with slashed income tax rates and newincome tax slabs but no tax exemptions and deductions. It is to be noted thatonce you opt the option for a new tax regime, it will remain valid forsubsequent years.

Thenew tax regime provides you lower tax rates and new tax slabs and at the sametime, it removes tax exemptions. During her budget speech, the financeministers claimed that those with INR 15 lakh income will save INR 78,000 intaxes and those with lower incomes will get profit with new lower tax rates.But if you look deeply it may not be completely true.

Thenew tax regime brings 70 deductions and exemptions. It includes standardsdeductions of INR 50,000 available to all salaried individuals without the needto invest and up to INR 1.5 lakh deduction on mandatory contributions to EPF(Employees' Provident Fund) for most salaried people.

Underthe new tax proposal, people with an annual income of up to 2.5 lakh will nothave to pay any tax.

Forincome between 2.5 lakh to 5 lakh, the tax rate will be 5% (as earlier).

Thosewith an income of 5 lakh to 7.5 lakh will have to pay a reduced tax rate of 10percent.

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. Withall the major deductions removed, the next taxable income will go up and comeclose 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 doesnot depend on your income or salary structure. But you need to check yourinvestment habits, your age, duties, goals, and expenses. You will also have tocheck your actual income and deduction figures to decide whether to switch ornot.

Like,if you are a young individual and want to get rid of paperwork and see notax-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 bea tough task to select. But here, if you take multiple tax breaks, the olderregime is a good choice to save more on taxes.

Non-Salaried Individuals

Taxpayerswith business class do not get as many tax deductions and exemptions assalaried individuals. Because two major advantages of INR 50,000 standarddeduction and HRA are not available to business class, raising their taxliability to as much as twice of their salaried counterparts.

Moreover,as the gross income of non-salaried people increases, their tax outgo under theexisting tax regime will also go up. All in all, non-salaried people can getbenefit from the new tax regime.

Senior Citizens

Seniorcitizens aged above 60 survive mainly on interest income or gains from funds.Re-investing their income to claim 80C benefits will broadly disrupt their cashflow. A senior citizen having the annual income to INR 15 lakh will pay thesame tax of around INR 1.95 lakh under both new and old regimes.

Butin the existing tax regime, he will have to invest worth INR 2.5 to achieve taxoutgo of INR 1.95 lakh, whereas under the new regime he can pay the same taxwithout any investment. The new tax regime will mainly benefit those seniorcitizens who have higher incomes of INR 8 lakh or more.

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