Last Updated on: 26th April 2024, 02:22 pm
The Indian tax landscape has undergone significant changes in recent years, with the introduction of a new tax regime alongside the existing old tax regime. These two systems have key differences that impact how individuals file their taxes and the deductions they can claim.
In this article, we will delve into the details of the new tax regime and compare it with the old tax regime, shedding light on its implications and helping you make informed decisions about your financial planning.
Understanding the Two Tax Regimes
The new tax regime introduced in India offers a wider range of tax brackets with reduced rates for incomes up to Rs. 15 lakhs. However, it does not provide most of the exemptions and common deductions available under the old tax regime, such as Section 80C, Section 80D, and Section 80E.
The new tax regime imposes a lower tax rate of 10% for income between Rs. 5 lakh and Rs. 7.5 lakh and a rate of 15% for income between Rs. 7.5 lakh and Rs. 10 lakhs, whereas the old regime had a flat rate of 20% for this entire range of income.
Deductions Allowed Under the Regimes
Under the old tax regime, taxpayers have access to a wide range of deductions and exemptions, providing opportunities to reduce their tax liability significantly. These include deductions for investments in Public Provident Funds (PPF), Unit Linked Insurance Plans (ULIPs), Equity Linked Savings Scheme (ELSS), premiums of life insurance plan, employee provident fund, health insurance premiums, tuition fees, interest component of home loans, investment in National Pension System (NPS), and more.
However, the new tax regime offers relatively fewer deductions compared to the old regime. Some deductions allowed under the new regime include employer contributions to the NPS under Section 80CCD (2), a standard deduction of 30% of net rental income for rented dwellings, and transportation allowances for various purposes.
Exemption Limits in the Regimes
While both the new and old tax regimes have an exemption limit of Rs. 2.5 lakh for individuals aged less than sixty years, they diverge when it comes to senior citizens and super senior citizens. Under the old regime, senior citizens (aged between 60 and less than 80 years) enjoy a higher exemption limit of Rs. 3 lahks, while super senior citizens (aged 80 years or more) can avail of an exemption limit of Rs. 5 lahks on their annual income.
However, if these senior citizens or super senior citizens choose to opt for the new tax regime, they are limited to an exemption limit of Rs. 2.5 lakh only. heck out the life insurance tax benefits for both, the new and old tax rules before purchasing to have a clear idea.
Comparing Tax Liability: New vs. Old Tax Regime
Let’s crunch some numbers to understand how the tax liability differs between the new and old tax regimes. Consider a salaried taxpayer aged less than 60 years who earns an annual income of Rs. 18 lakh:
Scenario without any deductions:
New Tax Regime:
Standard Deduction: Rs. 50,000
Taxable Income: Rs. 17.5 Lakh
Tax Liability: Rs. 2.34 Lakh
Old Tax Regime:
Standard Deduction: Rs. 50,000
Taxable Income: Rs. 17.5 Lakh
Tax Liability: Rs. 3.51 Lakh
As we can see, without any deductions claimed, the new tax regime results in significantly lower tax liability compared to the old regime.
Scenario with deductions under the old tax regime:
New Tax Regime:
Standard Deduction: Rs. 50,000
Taxable Income: Rs. 17.5 Lakh
Tax Liability: Rs. 2.34 Lakh
Old Tax Regime:
Standard Deduction: Rs. 50,000
Tax Saving Investments: Rs. 2 lakh [Section 80C (1.5 lakh) + Section 80CCD (1b) (50,000)]
Taxable Income: Rs. 15.5 Lakh
Tax Liability: Rs. 2.87 Lakh
Even if tax-saving investments of Rs. 2 lakh are made under the old tax regime, the new tax regime still results in a significantly lower tax liability.
Deciding Between the Old and New Tax Regimes
Choosing between the old and new tax regimes depends on various factors and individual financial goals. The new tax system offers more flexibility as it does not require investments in eligible tax-saving instruments with lock-in periods like ELSS mutual funds or the National Pension System.
However, before making a decision, it’s crucial to evaluate and analyse your tax payable under both regimes using an income tax calculator to determine which option is more beneficial for you based on your specific circumstances.
Conclusion
In conclusion, understanding the differences between the new and old tax regimes is paramount when planning your finances and filing taxes in India. While the new regime offers lower tax rates, it comes with reduced deductions and exemptions compared to the old regime. By considering your financial goals and utilising available tools like income tax calculators, you can make an informed decision to maximise your benefits while ensuring a secure financial future for yourself and your loved ones.
