Income Tax: The Old Tax Regime vs The New Tax Regime - Which One Should You Opt For
Know how the new tax regime is different from the old tax regime. Understand which one is right for you.
It’s the season of income tax investment proof submissions. One common question that comes up during this stage is which tax regime should you choose- the old tax regime or the new tax regime. In this article, we will discuss the key difference between the two and help you understand which one is right for you.
The Two Income Tax Regimes
In India, income tax is levied on businesses and individuals based on a slab system. The government has prescribed different tax rates for different income slabs. The tax rates keep increasing as your income increases.
Every year, the Finance Minister announces these tax slabs in the Union Budget. During the Union Budget 2020, the government announced a new tax regime. This new regime allows you to pay your income tax as per the new tax slabs from FY 2020-21.
As per the provisions set by the government, the old tax regime and the new tax regime co-exist. So, as a taxpayer, you get to choose the regime of your choice. But how do you decide which income tax regime to opt for? Let’s find out!
Old Income Tax Regime- High Rates But Many Tax Saving Options
While the income tax rates here may seem high, the old regime provides various ways to reduce your tax liability. With over 70 tax exemptions and deduction options, you can bring down your taxable income, and as a result, pay less tax.
Some common exemptions are part of your salary, like the House Rent Allowance (HRA) and Leave Travel Allowance (LTA). You can claim deductions to lower your taxable income by investing, saving, or spending on specific items. The most common and popular income deduction is Section 80C of the Income Tax Act. You can bring down your taxable income by up to ₹1,50,000 with this section.
Some other income tax deductions that you can claim under the old regime are:
Standard deduction
Interest on home loan
Medical insurance premium
Interest on education loan
Under the old tax regime, you can bring down your taxable income significantly with a combination of exemptions and deductions. However, this also means that you will need to look for ways to optimise your salary, savings, and investments every year, to ensure that you keep your income tax to the minimum.
New Income Tax Regime – More Income Slabs With Lower Tax Rates, But Option To Reduce Taxe
Compared to the old income tax regime, the new tax regime is different in two aspects:
In the new income tax regime, the government has increased the income slabs, accompanied by lower tax rates.
However, with the new regime, all the tax exemptions and tax deductions that can be claimed under the old regime will not be available.
The benefit here is that you have the liberty to decide where and how you want to save/invest your money. So, you will no longer have to rush for tax-saving schemes or investments that may not align with your financial goals.
Old Tax Regime vs New Tax Regime
Let’s understand this with an example. Assume that your yearly income comes up to ₹6,00,000.
If you follow the new tax regime, you will be liable to pay income tax at the rate of 10%.
However, if you opt for the old tax regime, you can claim tax deductions of up to ₹1,50,000 under Section 80C, which can bring your taxable income down up to ₹4,50,000.
Which Income Tax Regime Should You Choose?
To make this decision, here is what you can do:
Calculate all the income tax exemptions you are availing currently.
Check the tax deductions that you claim.
Now, combine all your tax exemptions and deductions, and deduct them from your total annual income to know your taxable income.
Now check what your taxable income will be if you let go of these tax deductions.
This must be your deciding factor to choose which regime you should opt for.