March 29, 2024

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Tax saving season: old vs new tax regime for salaried taxpayers

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Old vs New Income Tax Slab: Learn the Difference | Tata AIA Blog

In budget 2020, the new tax regime with lower tax rates and higher tax slabs was announced. While it was a long-awaited regime, it came with a condition of forgoing all exemptions and deductions that are available as per the old tax regime. However, the good part in the budget was that it gave the option to choose between the new tax regime and the existing regime, leaving it up to you to decide the regime as per your preference.

Here, is a detailed breakdown to find an answer to which tax regime is better:

A comparison between old and new income tax slabs

Income Tax Slab (in Rs.) Old Tax Rates (%) New Tax Rates (%)
0-2.50 lakh 0 0
2.50 lakh-5 lakh 5 5
5 lakh-7.50 lakh 20 10
7.50 lakh-10 lakh 20 15
10 lakh-12.50 lakh 30 20
12.50 lakh-15 lakh 30 25
15 lakh and above 30 30

 

New tax regime – lower tax rates, more slabs but zero way to lower tax liability:

According to the new tax regime, new tax slabs and rates will be applicable if you forgo the tax deductions and exemptions as allowed in the old regime. Tax breaks that will be inapplicable as per the new tax regime are Section 80 C (mutual fund investment through ELSS funds, NPS, NSC, VPF, PPF etc.), Section 80 D (premium of medical policy), interest paid on home loan and HRA. Tax breaks on charitable donations and disabled will also not be available.

Old tax regime – Higher tax rates but several options to reduce tax liability:

Over years, the Indian government through inclusion of clauses to the Income Tax Act has allowed you to benefit from over seventy deduction and exemption options, which lowers your tax outgo. One of the popular sections crowded with deductions is Section 80C via which you can reduce your taxable income by Rs. 1.50 lakh. Besides this, there are various other sections that can provide tax deductions ranging from premiums paid towards health insurance policy to interest on loans like education and home loans. Crucial exemptions include leave travel allowance (LTA), house rent allowance (HRA), standard deductions etc. while major tax deductions include PPF, investment in mutual fund through ELSS mutual funds, EPF, life insurance premium, investment in NPS, saving account interest, health insurance premium, life insurance premium, children tuition fee, etc.

Note that a combination of deductions and exemptions can pull down your tax liability by lakhs. However, this also means each year you will have to figure out strategies to optimise your savings/investments to keep your taxable income at a minimal margin.

Final verdict

As on availing the new regime, you will have to forgo numerous benefits such as standard deduction, LTA, HRA with several investment being mandatory for you like EPF contribution, school fee, life insurance/health premium, home loan repayment etc., it would make sense to stick with the old regime. New tax regime, on the other hand, may make sense if you have liquidity issues with not many tax deductions to claim for.

However, as deductions will differ from individual to individual, the selection between the two regimes is personal. To make an informed decision, it is crucial to calculate and compare between the options before you make the final call.

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