Which tax regime is benefit to opt for?

Which tax regime is benefit to opt for?

NEW TAX REGIME OR OLD ?

In Budget 2020, our finance minister had announced a new tax regime. The finance minister has given the taxpayers to choice between the new regime and existing one. The choice is depending on the taxpayers, on what regime they would like to opt for.

The new tax regime is a concessional tax regime with more tax slabs and lower taxes. But to opt for this new tax regime, the taxpayers have to forego certain exemptions and specific deductions and exemptions, which was available to him in the old tax regime.

 

OLD TAX REGIME – HIGH INCOME TAX RATES BUT LOT OF OPTIONS AVAIALBE FOR DEDUCTION

In current tax regime, the tax rates are high. But there are lot of ways to reduce your tax liability.

In this regime, the taxpayer can reduce his tax liability by claiming some of the exemptions and deductions.

Exemptions: - House Rent Allowance (HRA), Leave Travel Allowance, Leave Encashment, Uniform Allowance, etc.

Deduction: - Standard Deduction of Rs. 50000, 80 C Deduction of upto Rs.  1.5 lakh, Principal and Interest Component of  Home Loan, etc.

 

NEW TAX REGIME – LOWER TAX RATES BUT HAVE TO SACRIFICE THE EXEMPTION/DEDUCTIONS

This new tax regime is much different from the old one.

In new regime, the tax slabs have been increased and the rates of tax has been lowered. But all the exemptions and deductions that was used by taxpayers in existing regime won’t be available in this new tax regime.

The comparison of tax slabs in the old and new tax regime

 

Tax Slabs (Rs.)

Old Tax Rates

New Tax Rates

0 – 2,50,000

0%

0%

2,50,000 – 5,00,000

5%

5%

5,00,000 – 7,50,000

20%

10%

7,50,000 – 10,00,000

20%

15%

10,00,000 – 12,50,000

30%

20%

12,50,000 – 15,00,000

30%

25%

15,00,000 and above

30%

30%

 

WHICH WOULD BE BENEFICAL TO OPT?

It is very complicated to decide, for which option one must go? But for the answer, we have to go in a systematic way.

You all need to do is:-

  1. Calculate all the exemptions that you are available with
  2. Also you need to calculate all the deductions that you can claim

Now, combine these exemptions and deductions and subtract the total from your gross salary, so that you are able to reach at taxable income. Now what would be your taxable income if have let go all those exemptions and deductions. This is how, taxpayers can decide what regime they should go for?

 

The pros of new tax regimes: -

  • The new tax regime provides for lower tax. Also, as most of the deductions and exemptions are not available, the documents required is lesser and tax filing is easier.
  • Investor may not prefer to lock-in funds in investment for specified period for tax benefit. Since in this regime, the tax benefit on account of locked-in funds won’t be available. So, the taxpayers can now invest in open-ended funds, and don’t have to invest the funds for a restricted period.
  • The reduced tax rates will provide more disposable income to the taxpayer.

 

The cons of the new tax regimes: -

  • Non-availability of certain specified deductions:

Taxpayer cannot avail the following illustrative list of deductions :-

a) Clauses referred in section 10 as follows:

(i) Leave travel concession;

(ii) House rent allowance;

(iii) Special allowance (such as children education allowance, hostel allowance, transport allowance, per diem allowance, uniform allowance, etc.)

(iv)  Allowances to MPs/MLAs;

(v) Allowance for clubbing of income of minor;

(b) Exemption for SEZ unit under section 10AA;

(c) Standard deduction, deduction for entertainment allowance and employment / professional tax as contained in Section 16;

(d) Interest under section 24 in respect of self-occupied or vacant property (loss under the head Income from House Property for rented house shall not be allowed to be set off under any other head and would be allowed to be c/f as per extant law);

(e) Additional depreciation under section 32(1)(iia);

(f) Deductions under sections 32AD, 33AB and 33ABA;

(g) Various deductions for donation or expenditure on scientific research contained in sub-clause (ii) or sub-clause (iia) or sub-clause (iii), of sub-section (1) or sub-section (2AA) of section 35;

h) Deduction under section 35AD or 35CCC;

(i) Deduction from family pension under clause (iia) of section 57;

(j) Any deduction under chapter VI-A (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.). However, deduction u/s 80CCD(2) and section 80JJAA (for new employment) can be claimed

 

The choice to opt can be exercised every year and any regime which is beneficial can be adopted by the individual (except for those who have income from business or profession). Iindividuals who have income from business or profession cannot switch between the new and old tax regimes every year.  If they opt for the new taxation regime, such individuals get only one chance in their lifetime to go back to the old regime. Further, once switched back to existing tax regime, they will not be able opt for new tax regime unless their business income ceases to exist.

The income tax department has brought out a tax comparison utility, which is available on their web portal and in which, an individual taxpayer can use to evaluate which option is better for him/her.

The link to the same is as under: https://www.incometaxindiaefiling.gov.in/Tax_Calculator/