This is the time of year when employees of many firms start receiving requests to share details of their tax-saving investments with their employers. However, before that, you have to choose whether you want to opt for the new tax regime or the old tax regime.
Budget 2020 has come up with a new tax regime as per Section 115BAC of the IT Act, 1961, that allows specific and Hindu Undivided Family (HUF) taxpayers to pay income tax at lower rates. After the financial year 2020 -21, the taxpayer can either choose to pay income tax within the new tax regime or continue with the old tax regime.
“Ruchika Bhagat, a chartered accountant, and MD of Neeraj Bhagal Co, a chartered accountancy organization, said that If you want to opt for the newer ones, then employees will have to inform their employer via the declaration form. Then the employer will accordingly start deducting TDS monthly.
In case you are not able to clearly choose between the new and old tax regimes to go for, here are a few important things that can assist you in reaching a conclusion.
Analyse the Tax Slab Rates
Different slab rates are one of the main differences between the old regime and the new tax structures. Some taxpayers pay income tax according to the slab system they belong to. The tax slabs are made by keeping the income of the individual in mind. Thus, people with higher incomes will pay more.
New Tax Regime (Default)
- For salaried individuals, a Standard Deduction of ₹75,000 applies.
- Zero Tax up to total income of ₹12 Lakh, other than special rate income due to rebate under section 87A.
- Marginal Relief is also given if the income slightly exceeds Rs 12 lakh, meaning the incremental tax cannot exceed the incremental income.
- The maximum surcharge rate is 25%
Old Tax Regime (Optional)
- The Old Tax Regime is still available for those who wish to claim various deductions like 80C (PPF, LIC), 80D (Health Insurance), and HRA.
- For salaried individuals, a Standard Deduction of ₹50,000 applies
Check the Benefits of Tax Deductions & Exemptions
One more well-known difference between the old and the new regimes is the option to decrease taxes. Ruchika Bhagat said that no deduction is allowed under the new tax regime. A taxpayer has many options in the old tax regime, but in the new tax regime, one can claim either zero deduction or tax exemption.
In addition, under the old system, taxpayers have about 70 exemptions and deductions to lower their taxable income. This refers to grants to taxpayers to reduce the tax amount by saving, investing, or spending on certain items.
The massive deductions have been permitted under Sections 80C, 80CCC, and 80CCD. Additionally, with it, one can declare deductions as per sections 80D, 80DDB, 80E, 80EE, 80G, 80TTA, 80RRB, 80IA, 80IB, 80JJA, 80JJAA, 80LA, 80QQB, 80RRB, etc.
Ruchika further added that if we take exemptions and deductions, a significantly lower tax expense to cover the excessive tax rate you may be paying, calculate before making a decision. Bhagat says that the advantages of the old tax regime or the new tax regime will change from person to person. She says that only the income and options available to the taxpayer can tell which one is beneficial to him. Most exceptions are part of one’s salary, such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA).
“Nitin Mohan Kashyap, a chartered accountant associated with Coopers Tax Consulting, a tax consulting organization. Says that This new tax regime removes most of the deductions and exemptions otherwise available to the taxpayer. Thus, the taxpayer has to be very careful and compare whether his final tax liability will be less if he opts for the new tax regime. He illuminates how the fresh tax regime may seem complex for several.”
“Kashyap further added that Those opting for the new tax regime need to prepare two sets of tax calculations to arrive at a decision, which will again be a daunting task for a taxpayer considering complex tax laws. Again no straight-jacket formula can, in general, give a clear distinction between the two options, and it depends on a case by case basis what is best for the taxpayer.”
The new tax regime may be beneficial mainly for those taxpayers who do not seek deductions and exemptions, as the tax rates under the new tax regime are lower.
