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New Tax Regime Vs Old: How You Can Save More Tax On Your Salary

The changed new tax regime is a bid to draw more individuals away from the deduction-heavy old regime.

<div class="paragraphs"><p>(Photo: StellrWeb/Unsplash)</p><p></p></div>
(Photo: StellrWeb/Unsplash)

In a bid to nudge the individual taxpayer towards the simplified new tax regime, which was introduced in Budget 2020, Finance Minister Nirmala Sitharaman proposed a number of changes, including a reconstitution of the income slabs and the introduction of standard deduction.

The result, in several cases, will likely make the new tax regime a lot more attractive for individual taxpayers.

As an illustration, take a salaried individual with a gross income of Rs 10 lakh. According to changes proposed for the new financial year, this individual will be able to claim a standard deduction of Rs 50,000, which is not allowed this year. The remainder, Rs 9.5 lakh, is taxable under the newly reconstituted slabs.

New Tax Regime Vs Old: How You Can Save More Tax On Your Salary

The total tax payable, including the 4% education cess, amounts to Rs 54,600. In comparison, an individual with a gross income of Rs 10 lakh opting for the new tax regime this year would have to pay a tax of Rs 78,750.

But how does the proposed new tax regime compare with the trusty old tax regime? After all, so far, the number of exemptions and deductions has made individual taxpayers chary of making the shift to the new regime.

While the deductions under the old regime are significant, in our illustration we’ve only assumed what an individual would comfortable be able to invest and spend. For example, the individual in the illustration claims the full Rs 1.5-lakh benefit under Section 80C; Rs 25,000 under Section 80D for health insurance premiums; and most importantly, Rs 1.8 lakh rupees or Rs 15,000 per month as House Rent Allowance or interest payment on a home loan under Section 24. These assumptions call for tax-saving investments and expenses of Rs 32,313 per month.  

New Tax Regime Vs Old: How You Can Save More Tax On Your Salary

In this illustration, the individual would end up paying tax of Rs 32,760. However, an individual not living on rent or not paying an interest on a home loan would have to pay a much higher Rs 68,760.

In other words, an individual not claiming the benefits of Section 24 or earning house rent allowance would be better off transitioning to the new tax regime next financial year. What’s more, the new tax regime also results in much more money in the hands of the individual.