Old Tax Regime Vs. New Tax Regime: Which one is better?

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Old Tax Regime Vs. New Tax Regime: Which one is better?

Union Budget 2020 has introduced a dual tax regime by providing a choice to the taxpayer to either opt for a new regime of concessional tax rate without any deduction & exemptions or continue with the old tax regime of higher tax rate albeit with deductions & exemptions. It has given a freedom & flexibility to the taxpayers to make a suitable choice. The difference of tax rate in the old regime vis a vis regime is as under:

Income Slab Old Tax Rate New Tax Rate
Up to Rs. 2.50 Lakh 0 0
Rs. 2.50 Lakh to Rs. 5 Lakh 5% 5%
Rs. 5 Lakh to Rs. 7.50 Lakh 20% 10%
Rs. 7.50 Lakh to Rs. 10 Lakh 20% 15%
Rs. 10 Lakh to Rs. 12.50 Lakh 30% 20%
Rs. 12.50 Lakh to Rs. 15 Lakh 30% 25%
Above Rs. 15 Lakh 30% 30%

The old regime have just 3 applicable tax rates of 5%, 20% & 30%, as against 6 granular rates of tax under new tax regime. Under the new tax regime, concessional tax rates are proposed for taxpayer 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.

New tax regime requires taxpayers to forgo most of the exemptions & deductions and so taxpayers are in a 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* Tax in New Regime* Tax Saving
Rs. 2.50 Lakh 0 0
Rs. 5 Lakh 13000# 13000# 0
Rs. 7.50 Lakh 65000 39000 26,000
Rs. 10 Lakh 1,17,000 78,000 39,000
Rs. 12.50 Lakh 1,95,000 1,30,000 65,000
Rs. 15 Lakh 2,73,000 1,95,000 78,000
Rs. 20 Lakh 4,29,000 3,51,000 78,000

(In New Income Tax regime, Tax slab rates are same for all individuals   including senior citizens and Very Senior citizens).

    Tax calculated above is inclusive of 4% cess.

          # Ignoring tax rebate u/s 87A.

On the face of it, new regime displays net saving 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 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 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. Few of the common deduction which majority of the taxpayers avails are

  1. Deductions u/s 80C up to Rs. 1.50 Lakh towards LIC/PPF/Housing Loan Principal repayment, etc
  2. Deductions u/s 80CCD(1B)  up to Rs. 50,000 towards National Pension Scheme
  3. Deduction up to Rs. 30,000/- towards mediclaim & preventive health check up (Parents mediclaim deduction is not claimed by many & hence ignored).
  4. Rs. 50,000/- of standard deductions by salaried taxpayers
  5. HRA / LTC deductions by salaried taxpayers
  6. Rs. 10,000/- saving bank account interest u/s 80TTA (Rs. 50,000/- by senior citizens u/s 80TTB)
  7. Housing Loan interest up to maximum of Rs. 2 Lakh by taxpayers who have availed housing loan.

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 tax payers make this choice? Both regimes have their own sets of pros and cons. The choice would necessarily dependant on:

  1. Income slab of every individual.
  2. Extent of exemptions and deduction available with the taxpayers.
  3. Alternate investments options & returns thereon if taxpayers prefer not to     opt for the new regime.
  4. Short term and long term financial goals of the taxpayers.

With above background, following observation can further help 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 lower tax burden on them.
  2. For taxpayers who have higher family or personal commitment and finding it difficult to save & invest money adequately, new tax regime would be a boon for them. Similar will be the case of individuals who don’t have commensurate exemptions/ deductions.
  3. Taxpayer without any business income will have free entry & exit option in the new regime. However, in case of taxpayer with business income, free entry & exit option is not there. Such business assessee has to make a choice of preferred tax regime before filing income tax return. Option once chosen cannot be withdrawn except on one subsequent occasion.
  4. 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.
  5. 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.
  6. 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.
  7. 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.

Conclusions:

One needs to calculate the total income tax under old as well as new regime individually. So long as the benefit of exemptions and deduction is more than impact of higher tax rate 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 have 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.

[Readers may forward their queries at nareshjakhotia@gmail.comOther articles & response to queries are available at www.theTAXtalk.com]

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