“Be careful what you wish for, there’s always a catch”. –

These words by Laurie Halse Anderson aptly apply to Indian tax payers today.

The finance minister announced a new tax regime in Budget 2020, which included additional tax slabs and lower tax rates. Most taxpayers have long requested this, but it came with the condition that all deductions and exemptions allowed under the old tax system would be removed.

To add to the confusion, the finance minister offered taxpayers the option of choosing between the new tax regime and the old tax regime, leaving it up to the taxpayer to choose. As a result of all of these factors working together, tax rules have become more complicated rather than simpler.

Wondering, "What to choose - new tax regime or old tax regime?" This article can assist you in determining which tax regime to choose. Let's look at the tax slabs, tax rates, as well as the advantages and disadvantages of the two tax regimes. Followed by a comparison between the two. So, let's get started.

New tax regime – More slabs, lower tax rate but no way to reduce taxes

There are two main differences between the new tax regime and the old tax regime.

One, in the new regime, the number of tax slabs have increased, accompanied by lowering of rates in the sub-Rs. 15 lakh range.

Second, in the new regime, taxpayers won't be able to take advantage of any of the deductions and exemptions that were available in the existing tax regime.

The following is a comparison of the old tax rates and new tax rates:

Tax Slab(₹) 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%

Above Rs. 15,00,000

30%

30%

Old Tax Regime – High Rates but Lot of Options to Reduce Taxes

To say the least, the old tax regime is complex. Despite the high tax rates, there are numerous ways to lower your tax payable.

The government has provided Indian taxpayers approximately 70 exemptions and deduction options through the addition of sections to the Income Tax Act over the years. Hence, allowing individuals to reduce their taxable income and pay less tax.

While some exemptions, such as the House Rent Allowance (HRA) and Leave Travel Allowance (LTA), are included in your salary, deductions allow you to reduce your tax liability by investing, saving, or spending on specific goods/services. Section 80C is one of the most popular and opted deductions, allowing you to reduce your taxable income by Rs 1,50,000.

Aside from that, there are several more Sections that allow you to avail deductions, for instance, interest on your loans (both house and education) or premiums paid on health insurance policy.

The following are the most popular tax exemptions and deductions available to Indian taxpayers:

Exemptions Deductions

House Rent Allowance

Public Provident Fund

Leave Travel Allowance

ELSS (Equity Linked Saving Scheme)

Mobile and Internet Reimbursement

Employee Provident Fund

Food Coupons or Vouchers

Life Insurance Premium

Company Leased Car

Principal and Interest component of Home Loan

Standard Deduction

Children Tuition Fees

Uniform Allowance

Health Insurance Premiums

Leave Encashment

Investment in NPS

 

Tuition fee for Children

 

Saving Account Interest

Your taxable income might be reduced by lakhs because to a combination of exemptions and deductions. However, it also means that you must discover strategies to maximize your salary, investments and/or savings each year in order to keep your taxable income to minimum.

Old Income Tax vs. New Tax Regime: Which One to Choose?

Because everyone's eligibility for deductions, sources, and amount of income are different, one rule cannot be applied to everyone. Therefore, it becomes important for taxpayers to analyze and understand the tax payable under both regimes before deciding which one to choose.

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

Because, with these changes, as per the new tax regime, anyone earning Rs. 7.50 lakh will have to pay Rs. 25,000 in taxes. While, those earning Rs. 10 lakh will save Rs. 37,500 in taxes.

However, the devil, as they say, lies in detailing. In order to save taxes under the new tax regime, you will have to say goodbye to all the tax exemptions and tax deductions.

While deciding whether to opt for the old tax regime or new tax regime may appear tough, it is not as difficult as it appears when approached in a systematic manner.

Here's what you should do:

Step 1 – Calculate all of the tax exemptions (refunds) that you can claim

If you are staying on rent, you will be claiming HRA (Home Rent Allowance), which is the largest salary exemption available. Other than this, other tax-free components like LTA (Leave Travel Allowance), Food Bills, Phone Bills, and so on can be availed. If you opt to switch to the new tax regime, all of these “tax-free” will become “taxable”.

Step 2 – Calculate all the tax deductions that you claim

As a salaried employee, you will automatically receive two deductions:

  1. Standard deduction of Rs 50,000
  2. Your contribution to your Employee Provident Fund (EPF).

Even if you continue to contribute to EPF, you won't be able to collect these deductions under the new tax regime. Furthermore, you will be unable to claim deductions for your home loan (if you have one) or life insurance policies, or health insurance policies which have previously helped you in lowering your taxable income.

Step 3 – Combine these tax exemptions and tax deductions and subtract them from your salary to get your taxable income.

Step 4 – Similarly, calculate your taxable income if these deductions and/or exemptions were removed.

The results will help you decide which tax regime you should opt for.

Here are two examples of tax liabilities with and without tax exemption and/or deductions under both the old and new tax regimes for your convenience.

To begin with, keep in mind the following tax slabs for comparison:

Annual Income Old Tax Regime Rates New Tax Regime Rates

Up to ₹ 2.5 lakhs

Exempt

Exempt

₹ 2.5 to 5 lakhs*

5%

5%

₹ 5 to 7.5 lakhs

5%

10%

₹ 7.5 to 10 lakhs

20%

15%

₹ 10 to 12.5 lakhs

20%

20%

₹ 12.5 to 15 lakhs

30%

25%

Above ₹ 15 lakhs

30%

30%

  • Section 87A provides a tax rebate to individual taxpayers if their total income is less than Rs 5 lakh after claiming deductions 80C to 80U

Example 1 - Taxpayer with Income of ₹ 12.5 lakhs

According to the tax slabs given above, the old tax regime rate is 30% and the new tax regime rate is 25% for a salary income of 12.5 lakhs. Let us now calculate the total tax due after taking into account the deductions allowed under the old tax regime.

Particulars Old Tax Regime New Tax Regime

Annual Income

12,50,000

12,50,000

Taxable Income

12,50,000

12,50,000

Less- Standarad Deduction

50,000

-

Less- Deductions U/s 80C

1,50,000

 

Less- Deductions U/s 80D*

75,000

-

Taxable Income

9,75,000

12,50,000

Total Tax Payable

1,11,800( Approx)

1,30,000

(*) assuming for self and dependent parents being senior citizens ₹ 25,000 and ₹ 50,000 respectively.

In this scenario, the old tax bracket is advantageous. If you choose the old tax regime over the new one, you would save Rs 8,000 more in taxes.

Except above deductions, HRA and other deduction also can be claimed in old regime.

Example 2 - Taxpayer with Net Income of ₹ 8 lakhs from Salary

Particulars Old Tax Regime New Tax Regime

Annual Income

8,00,000

8,00,000

Taxable Income

8,00,000

8,00,000

Less- Standarad Deduction

50,000

-

Less- Deductions U/s 80C

1,50,000

 

Less- Deductions U/s 80D*

50,000

-

HRA/LTA & Other

50,000

-

Taxable Income

5,00,000

 

Total Tax Payable

0

46,800

Bottom Line

Both the new income tax slab and old income tax slab have their own advantages and disadvantages. Whether you choose the new or old tax regime should have no doubts in mind - whether you should save and avail a life insurance policy or not.

The objectives for purchasing and saving/ investing in life insurance should be to achieve your life goals and secure your family's future, not just to take advantage of tax benefits.