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

 

Query]

I am a salaried taxpayer with salary, interest & Dividend income of around Rs. 21 Lakh. My wife is into the coaching classes and has an income of around Rs. 9 Lakh. Now, the income tax return can be filed either under the old tax regime or new tax regime. Which tax regime is better? How to choose the right tax regime? Whether we can keep on changing the tax regime on a year to year basis as last year the return was filed under the old tax regime? Any special precaution needs to be taken before opting for any particular tax regime? Whether I need to file any specific form for choosing any one tax regime? [ra*****k@gmail.com]

 Opinion:

Income Tax Return for the FY 2021-22 (AY 2022-23) has to be filed by the individual taxpayers by choosing any one of the two optional tax regimes. Every Individual & HUF have the option to choose between the Old Tax Regime vis a vis New Tax Regime. Though the new Tax Regime provides for concessional tax rate, it is with a rider that the taxpayers will not be able to claim various deductions and exemptions. Before taxpayers opt for the new tax regime, following points must be noted by the taxpayers:

1. Option of the Tax Regime has to be exercised carefully by the Taxpayers with Income from Business & Profession:
   Taxpayers without any business income will have a free entry & free exit option in the new regime. Decisions can be taken in isolation every year as per the income, deductions and exemptions of every year.
   However, it is not so for a person having income from Business or Profession (i.e., in case of your wife). In such a case, options once exercised cannot be withdrawn except on one subsequent occasion. Taxpayers in such cases have to be very careful while exercising an option of a new tax regime as contained in section 115BAC. More importantly, the option has to be exercised not only considering the income of the current financial year but also considering the future planning & its impact in the succeeding years.

2. Filing of Form No. 10-IE before the Due Date:
   For opting the New Tax Regime, filing of Form No. 10IE before the due date is mandatory for the taxpayers with income from Business and profession. Without filing Form No. 10IE, such taxpayers cannot take the benefit of the New Tax Regime.  However, for taxpayers who don’t have income from Business and profession, filing of Form No. 10IE is not required and such taxpayers can opt for the new tax regime by just clicking it at the relevant in the ITR Form 1 or Form

3. The difference of tax rate in the Old Regime vs New Regime is as under:

Income Slab	Tax Rate under Old Tax Regime	Tax Rate under New  Tax Regime
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 has just 3 applicable tax rates of 5%, 20% & 30%, as against 6 slab rates of tax under the new tax regime. 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.

4. Which Tax Regime is better for the Taxpayers?
   This is the most common question which is there in the mind of every taxpayer? 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/HUF	Tax in Old Regime*	Tax in New Regime*	Tax Saving
Rs. 2.50 Lakh	0	0	0
Rs. 5 Lakh	13000#	13000#	0
Rs. 7.50 Lakh	65,000	39,000	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 the New Income Tax regime, Tax slab rates are the 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.

Making the Right Choice of Tax Regime:

Apparently, though the new regime displays net savings in tax but it may not be positive for all taxpayers after considering exemptions and deductions. Though the new tax regime is simple to follow yet it will be worthwhile to calculate the total income tax under the old as well as new regime individually. So long as the benefit of exemptions and deductions 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:

1. a)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. b)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.
3. c)Taxpayers with income up to Rs. 7.50 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of at least Rs. 2 Lakh may find it relevant to stay in the old tax regime.
4. d)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.
5. e)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.
6. f)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.
7. g)Old tax regime will be better for the taxpayers with income exceeding Rs. 15 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of more than Rs. 2.50 Lakh.