29 Aug 2022 ANKIT CHADHA

Which Tax Regime is Better for you, the New or the Old One?

Which tax regime better for you | TRC Consulting

In Budget 2020, the finance minister announced a new tax regime that included new tax slabs and lower tax rates. The majority of taxpayers have long requested this, but it came with the caveat that all deductions and exemptions allowed under the old tax system would be eliminated. 

The finance minister gave taxpayers the option of choosing between the new and old tax regimes, leaving the decision up to them. Because of the interaction of all of these factors, tax rules have become more complicated rather than simpler. 

Thinking, "What should I choose: a new tax regime or an old tax regime?" This blog can help you decide which tax regime to use. 

Old Tax Regime vs. New Tax Regime 

There are two major differences between the new and old tax regimes. 

One, the number of tax slabs has increased in the new regime, accompanied by lower rates in the Rs. 15 lakh range. 

Second, taxpayers will be unable to take advantage of any of the deductions and exemptions that were available under the previous tax regime under the new regime. 

A comparison of old and new tax rates is provided below: 

TAX SLAB 

OLD TAX RATE 

NEW TAX RATE 

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 & ABOVE 

30% 

30% 

Old Tax Regime

To say the least, the old tax system is complicated. Despite the high tax rates, there are many ways to reduce your tax liability. 

Through the addition of sections to the Income Tax Act over the years, the government has provided approximately 70 exemptions and deduction options to Indian taxpayers. As a result, individuals can reduce their taxable income and pay less tax. 

While some exemptions are included in your salary, such as the House Rent Allowance (HRA) and Leave Travel Allowance (LTA), deductions allow you to reduce your tax liability by investing, saving, or spending on specific goods/services.  

Section 80C is a popular and widely used deduction that allows you to reduce your taxable income by Rs 1,50,000.  

Aside from that, there are several other Sections that allow you to deduct things like interest on loans (both home and education) or health insurance premiums.  

The most popular tax exemptions and deductions available to Indian taxpayers are as follows: 

EXEMPTIONS 

DEDUCTIONS 

House Rent Allowance 

Public Provident Fund 

Leave Travel Allowance 

Equity Linked Saving Scheme 

Mobile & Internet Reimbursement 

Employee Provident Fund 

Food Coupons & Vouchers 

Life Insurance Premium 

Company Leased Car 

Principal & Interest t component of Home Loans 

Standard Deduction 

Children tution fees 

Uniform Allowance 

Health Insurance Premiums 

Cash Enhancement 

Investment in NPS 

 

Tution fees for children 

 

Saving Account Interest 

The advantage of Old Tax Regime is individuals were instilled with a savings culture over time by the old income tax regime, which required investments in specific tax-saving instruments. It leads to saving for future events such as marriage, education, home purchase, medical expenses, and so on. 

Despite its many benefits, the old tax structure has some limitations. The following are the limitations of the previous tax regime: 

  • The investment lock-in period is detrimental to liquidity. 

  • Current level of consumption as a result of committed investments. 

  • There are only a few tax-saving investments available. 

  • Evidence retention for claimed deductions is inconvenient. 

  • Not advantageous for taxpayers with no or few tax-deductible transactions. 

New Tax Regime 

It has six tax brackets, each with a lower rate on income up to Rs. 15 lakhs. Because of the different income levels and tax rates, multiple exemptions and deductions are not available. 

The new tax scheme differs from the previous one in two ways: 

1. The new system has increased the number of tax slabs, with reduced rates in the Rs. 15 lakh brackets. 

2. All exemptions and deductions available to taxpayers under the old regime will be unavailable under the new regime. 

The following are the advantages of the new tax structure: 

The current tax regime remains in effect, and taxpayers can choose between the old and new tax regimes that best suit their needs. There have been no penalties imposed by the government for failing to convert to the new tax regime. 

The new tax regime allows taxpayers to invest their money without restriction. Under the new programme, there are no mandatory rules and regulations governing your investment pattern. 

You, the taxpayer, will fall into the tax slab that best matches your annual income. 

The disadvantage of the new tax structure is that because there are no exemptions, your total taxable income will be higher than it was under the previous tax system. 

Which is better: the old income tax or the new tax regime? 

One rule cannot apply to everyone because everyone's eligibility for deductions, sources of income, and amount of income differs. As a result, before deciding which regime to use, taxpayers must analyse and comprehend the tax payable under both regimes. 

Although the new system appears to be better at first glance due to lower tax rates, this is not the case. 

Because of these changes, anyone earning Rs. 7.50 lakh will have to pay Rs. 25,000 in taxes under the new tax regime. Those earning Rs. 10 lakhs, on the other hand, will save Rs. 37,500 in taxes. 

To save taxes under the new tax regime, you will have to give up all tax exemptions and deductions. 

While deciding between the old and new tax regimes may appear difficult, it is not as difficult as it appears when approached methodically. 

Here's what you should do: 

Step 1: 

Determine all of the tax breaks (refunds) available to you 

If you live in a rented home, you will be claiming HRA (Home Rent Allowance), the largest salary exemption available. Other tax-free components available include LTA (Leave Travel Allowance), Food Bills, Phone Bills, and so on. If you decide to switch to the new tax system, all of these "tax-free" items will become "taxable." 

Step 2 : 

Total up all of your tax deductions  

As a salaried employee, you will be subject to two automatic deductions: 

  • Rs 50,000 is the standard deduction. 

  • Your Employee Provident Fund contribution (EPF). 

Even if you continue to contribute to EPF, you will no longer be eligible for these deductions under the new tax regime. Furthermore, you will no longer be able to claim deductions for your home loan (if you have one), life insurance policies, or health insurance policies, all of which previously helped you reduce your taxable income. 

Step 3: 

Add these tax exemptions and deductions together and subtract them from your salary to calculate your taxable income. 

Step 4:

Determine your taxable income if these deductions and/or exemptions were eliminated. 

The results will help you decide which tax regime to use. 

TRC can help you with the dealing of your favorable Tax Regime

TRC Corporate Consulting Private Limited professionals provide the alternatives you seek and will achieve the most efficient results for your tax planning needs. Our clients, both Indian businesses and multinational corporations, face a variety of challenges when it comes to domestic and international tax laws.  

Our focus is on providing effective tax advice, innovative planning to reduce the tax burden you face, and improving your company's financial performance. We keep you up to date on the latest changes affecting your business and provide tax solutions that are both practical and creative.  

Clients recognize that our research, case development, and undeniable expertise result in pervasive and refreshing solutions as the advisor of choice for a growing number of privately held and publicly traded companies. 

 Frequently Asked Questions 

1. Which tax regime is better for higher income taxpayers? 

In this case, the old tax regime would be preferable. This is because the old tax regime provided a standard deduction of Rs 50,000 to all salaried taxpayers by default. Employee Provident Fund (EPF) contributions are mandatory, and this, along with the standard deduction of Rs 50,000, tilts the scales in favor of the old regime. 

2. Can we switch between old and new tax regime every year? 

The government has given employees the option of choosing between the old and new tax regimes. The decision is normally made at the start of the fiscal year, but if you have chosen the old tax regime but find a new system much more beneficial for you, you can switch to the new system while filing your income tax return. You cannot switch to another regime during the fiscal year prior to ITR filing.

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