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Old Vs New Tax Regime: Tax Slabs, Exemptions and Deductions
Table of Contents
Overview Of Old Regime vs New Regime
According to the Income Tax Act, income tax is charged to every individual, HUF, partnership firm, LLP, and corporation. An individual is subject to a slab system of taxation if their earnings exceed the minimum threshold limit (i.e. basic exemption limit). Under a slab system, different tax rates are established for various income categories. It implies that a taxpayer's tax rate will increase as his or her income does. The government can establish liberal and equitable taxes with the help of this kind of taxation. Nirmala Sitharaman, the finance minister, announced a new tax system with more tax slabs and lower income taxes in the Budget 2020. The majority of taxpayers have long demanded this, but there is a catch: all deductions and exemptions from the previous tax system must also be removed. The tax slabs, whether they were under the previous tax regime or the new one that was implemented in 2020, saw no significant changes in the Union Budget 2022. So how does a citizen choose between the new and the old tax system? A meticulous comparison of tax outlays and other factors must be made in order to determine which regime would be valid and beneficial to a taxpayer. Before deciding between the new and old tax regimes, a taxpayer needs to take a few factors into account. Continue reading to learn more because the situation might be different for various income brackets. We will first explore in this blog post how the two tax regimes' tax rates and available deductions differ, as well as concrete examples of how the new system will affect various tax brackets.
Old Tax Regime: Lot of Options to Reduce Tax Liabilities
To put it mildly, the old tax system is complicated. Despite the high tax rates, there are many ways to lower your tax obligation.
Over the years, the government has provided Indian taxpayers with over 70 exemptions and deduction alternatives through the addition of provisions to the Income Tax Act, allowing them to reduce their taxable income and thereby reduce their tax obligations.
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While exemptions, like the House Rent Allowance (HRA) and Leave Travel Allowance (LTA), are included in your pay, deductions let you pay less in taxes by investing, saving, or spending money on certain things. The largest deduction is available under Section 80c, which allows you to reduce your tax liability by Rs. 1.5 lakh. Besides this, several other sections permit you to deduct expenses from your income, such as the premiums for health insurance as well as the interest on loans (for a home or higher education).
Your taxable income may be reduced by lakhs as a consequence of a combination of exemptions and deductions. To keep your taxable income at a minimum, you must, however, find ways to optimise your income and savings/investments each year.
Why You Should Choose the Old Tax System
By requiring investments in particular tax-saving instruments, the previous income tax system gradually ingrained a saving culture in people. It encourages saving for upcoming occasions like marriage, education, home purchases, medical expenses, etc.
Limitations of Choosing the Old Tax System
Despite its many benefits, the old tax system has some drawbacks as well. The following are some drawbacks of the previous tax system:
- Liquidity is harmed by the investment lock-in period.
- Current level of consumption as a result of committed investment sum.
- There are only a few investments that can reduce taxes.
- Maintaining records of claimed deductions is troublesome.
- Not beneficial for taxpayers with zero or fewer transactions that qualify for tax deductions.
New Tax Regime: Lower Tax Rates and More Slabs
The new taxation system differs from the previous one in two ways. It has more lower-tax slabs overall, for starters. And secondly, if the new tax structure is chosen, all of the significant exemptions and deductions accessible to taxpayers under the current (old) tax regime are not permitted.
The difference in slab rates is the primary distinction between the old vs new tax regimes. According to the slab system, they fall under, Indian taxpayers are required to pay income tax. By taking into account each person's average income, the tax slab is created. As a result, tax obligations for tax-paying citizens with higher earnings will be higher.
Another significant difference between the old and new tax systems is the ability to reduce taxes. The old tax system had many options available to a taxpayer, while the new tax system does not allow for any deductions.
Benefits of Choosing the New Tax System
The following are some advantages of the new tax system: -
- The current tax system is still in place, and taxpayers can select the old or new tax system that best suits their needs. Failure to transition to the new tax system is not subject to any penalties from the government.
- Taxpayers are free to make investments without any restrictions under the new tax system. Under the new programme, your investment behaviour is not subject to any requirements for rules and regulations.
- The taxpayer will be placed in the tax slab that best matches their yearly income out of the many available tax slabs.
Limitations to Choosing the New Tax System
The following are the new tax structure's drawbacks: -
- Your annual tax will increase if exemptions are not allowed compared to how it was taxed previously.
A Comparison of the Old Tax Regime and New Tax Regime Slabs
Under the previous system, taxpayers with annual incomes between Rs. 5 lakh and Rs. 10 lakh are subject to a 20% tax. In the new system, they will only be taxed at 10%, which is 50% of the previous rate. Those who earn between Rs. 7.5 lakhs and Rs. 10 lakhs per year will also be subject to a 15% taxable income.
However, if the citizen continues to benefit from the old tax regime's exemptions and their net tax liability is lower, they may do so.
Let's compare the previous and new tax slabs for people under 60.
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% |
15,00,000 & above | 30% | 30% |
Old Tax Regime vs New Tax Regime: Which Deductions and Exemptions are Permitted and Which Ones have been Excluded?
Exemptions imply the taxpayer not having to pay taxes on a particular amount of income. For instance, you are exempt from paying taxes on earnings from agriculture.
A deduction is a process of figuring out gross income after removing some of the taxpayer's investments and expenses. You can subtract, for instance, Rs. 20,000 from your gross income if you pay Rs. 20,000 for health insurance.
120 exemptions are provided under the "old tax regime." Not all of them provide benefits to taxpayers. Most of them make the direct tax system more complicated. The Ministry of Finance has eliminated about 70 exemptions after a thorough investigation. A new change for salaried employees is the old vs. new tax regime. Let's examine each of the exemptions and deductions that are available under the two systems.
List of Exemptions Available in the Old Tax Slab
List of a few tax exemptions and deductions from the previous tax rates (not present in the new regime)
The following list of exceptions is not all-inclusive:
- Salaried individuals could claim a standard deduction of Rs 50,000.
- Leave Travel Allowance
- House rent allowance depending upon salary structure and rent paid
- Professional tax paid by a maximum of Rs. 2,500/-
- Deductions available under Section 80TTA and 80TTB that is interest from Savings Accounts/Deposits
- Tax deduction on entertainment allowance and deduction on professional tax For government employees
- The interest amount payable on a home loan for a self-occupied or any vacant property u/s 24 maximum deductions of Rs. 2 lakhs
- Deduction of Rs 15,000 allowed from family pension under clause (ii) (a) Section 57
- Special Allowances that are provided under Section 10(14)
- Transport allowance granted to a disabled employee
- Conveyance allowance
- Any allowances granted for meeting the cost of travel on tour or transfer of an employee
- Daily allowance
- Perquisites
- Business owners and professionals will lose the exemption to Special Economic Zones under Section 10AA.
- Deductions under Section 32AD, 33AB, 33ABA, 35(1)(ii),35(1)(ii( (a), 35(1)(iii), 35(2AA), 35AD and 35CCC of the Income Tax Act.
- Options of additional depreciation under Section 32(ii) (a) of the Income Tax Act
- The option to carry forward or unabsorbed depreciation of earlier years
- Tax-saving investment deductions under Income Tax Act, Chapter VI-A 80C, 80D, 80E, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc. These tax-saving investment options include ELSS, NPS, PPF tax relief on mediclaim insurance premiums, FDR, dependents who are differently-abled, expenses for specified medical treatments, interest on education loans and many more.
List of Important Exemptions Retained in the New Tax Regime
Here are some exemptions as provided by the new tax regime
- interest received on Post Office Savings Account under Section 10(15)(i) the maximum amount of Rs. 3,500.
- Gratuity received from employer up to a maximum amount of Rs. 20 Lacs.
- Amount received from Life Insurance Policy on maturity under Section 10(10D).
- Employer contribution in NPS or EPF up to 12% of salary and interest on EPF up to 9.5% p.a.
- Standard reduction on rent.
- Retrenchment compensation.
- Leave encashment on retirement
- Income from Life Insurance.
- Income from agricultural farming.
- VRS proceeds up to Rs 5 lacs.
- Retirement cum death benefit.
- Money received as a scholarship for education.
- Interest and maturity amount of PPF or Sukanya Smriddhi Yojna.
- Commutation of Pension. The new tax regime offers you to claim deductions u/s 80CCD(2) (employers contribution in notified pension scheme) and 80JJAA (for new employment).
Old vs New Tax Regime: 6 Tips to Choose the Best Tax System for You
One can select the appropriate tax structure based on the following criteria:
- The new tax regime is ideal for you if you want versatility in your investments while also choosing not to invest in the aforementioned instruments. Therefore, before making any decisions, it is advised to first conduct a thorough analysis of old vs new tax regimes and the best available options.
- Additionally, keep in mind that you have the option to alter your decision each year. You can now select a tax regime from the old, new, or new as it suits you annually.
- Please take note that only individual taxpayers are affected by this; people who are employed in a business or other professions are not included. The decision must be made after careful consideration because these people would only have one chance to select between two regimes throughout their entire lives. Only after their company has shut down or ceased to exist can they transfer to the other tax regime.
- The income tax department has developed a tax comparison tool that is available on their web portal in light of the introduction of the new tax system. Individual taxpayers can access the website and use a comparison of the two tax structures to make better decisions.
- The new tax system's streamlined documentation procedure makes it easier to file IT returns quickly. Despite having easy access, most exemptions and deductions are not available to individuals.
- If a person can benefit more from tax deductions and exemptions under the old tax system, they should continue to do so because it is better for them.
As we stated at the beginning, the modifications made don't actually make things simpler for Indian taxpayers. There is one thing, though, with which you must exercise caution while considering the differences between the old vs new tax regime. Investment and insurance decisions should not be made based on whether you choose the new or old tax system. Your decision to invest and buy insurance should be based on achieving your life goals and securing the future of your family, not on the tax advantages you receive from doing so. Still confused about the old vs new tax regime in India? Connect with the financial experts at NoBroker and get all your queries resolved. Our expert team will ensure you have all your queries resolved without any hassle and help you in choosing the best regime as per your requirements.
FAQs
According to Budget 2020, a person who opts for the new tax system will forfeit about 70 tax deductions and exemptions.
No, a change was made to make filing taxes easier by the finance department. The New Tax regime and the Old Tax regime are available to taxpayers. Employees have the option to choose their option at the beginning of the financial year and change it the following year. As for company or profession, this option will only be available once in AY 2022–2023 though. Before deciding which tax system is best for you, it is advised that you research both options.
Under the new tax law, the following exemptions and deductions would be permitted:
Under Section 80CCD (2), your employer may contribute up to 10% of your salary to the NPS (or 14% if you work for the Central Government).
If a house property is rented out, a standard deduction of 30% of net rental income is allowed.
Rent from a house property can be deducted from the interest on the mortgage. Losses from the House Property head, however, cannot be offset against any other sources of income.
Employees of Divyang will be eligible for a transportation allowance exemption to cover daily travel costs between their place of employment and home.
A conveyance allowance will be given to cover the cost of the conveyance required to carry out the official duty.
The employees will be given allowances to cover the cost of their travel while on tour or during a transfer.
The daily allowance is given for regular daily expenses in the event of absence from the employee's usual place of duty.
No, the new tax rate regime does not offer as many deductions and exclusions as the previous/existing tax rate regime. Deductions under Section 80C are also not possible if the taxpayer selects the New regime's low tax slab rates.
If you are a salaried person, you can choose to do this each year, even when you file your income tax returns. For people with business income, the situation is a little more complex because once you select the new tax system, you cannot switch back to the previous system. These people or Hindu Undivided Families (HUF) won't be able to select a new tax system in subsequent tax years once the option is removed.
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