How to decide which tax regime is better?

How to decide which tax regime is better?

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How to decide which tax regime is better?

An option to opt for new tax regime is now given to the taxpayers. It is contained in section 115BAC.
Section 115BAC is applicable to Individual & HUF Only. In short, it is not applicable to other categories of the taxpayers. If the trust or AOP is taxable at the rate applicable to individual then it will be compulsorily be taxed at old tax regime and cannot be subject to new tax regime.
How to decide which tax regime is better?

To arrive at the correct conclusions, 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.
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.
 It may be noted that all above deduction will not be available if the taxpayers opts for new tax regime. With above common points just to know about exemptions and deductions, one can make the choice of tax regime with following points in mind:
  1. 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. The following observation may be helpful in choosing the right tax regime for the taxpayers:
  2. 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.
  3. For taxpayers who have higher family or personal commitment and find it difficult to save & invest money adequately, a new tax regime would be a boon for them. Similar will be the case of individuals who don’t have commensurate exemptions/ deductions.
  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. 2.50 Lakh may find it relevant to stay in the old tax regime.
[Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]

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