https://secureservercdn.net/166.62.108.196/2p9.429.myftpupload.com/wp-content/uploads/2020/06/blog3.jpg

Budget is announced every year, but when it comes to reforms in income tax, everyone is eagerly waiting for some relief in taxation. This same feeling was sensed in Budget 2020. It unveiled a new income tax regime, with new tax slabs and reduced tax rates; however, it is optional in the hands of the taxpayer whether to choose the new tax regime or stay with the old regime.

Tax payment helps a country in its development, so it is the responsibility of every resident to pay taxes on time. To ease the tax burden, government generally gives certain exemptions. For example HRA, investments under 80C like PPF, ELSS, Sukanya Samruddhi and many more.

Usually, most people consider tax planning at the end of the year and end up taking hasty decisions. But it is important to do planning at the beginning of the year as it can also help you achieve your financial goals. E.g. PPF investment can be linked with your retirement planning. But any such decision should be taken after considering your existing asset allocation. You can discuss more on this with your Financial Advisor.

Now let’s understand the basic difference between the old and the new tax regime.

According to the new tax regime, you will have to let go most of the exemptions such as Leave Travel Allowance (LTA), House Rent Allowance (HRA) etc. and deductions available under Section 80 such as 80C, 80D, 80G etc.

Even though the new rates are lower the benefit of lower rates will depend on the income bracket you fall into and the amount of exemptions & deductions you claim.

Let us learn this with an example:

Consider an individual with a gross annual income of Rs. 15,00,000. If the deductions and exemptions claimed by this person amount to a total of Rs. 2,50,000 a year, the taxable income under the old regime becomes Rs. 12,50,000 and the tax liability for Rs. 12,50,000 will be Rs. 1,95,000.

Under the new regime, without the benefit of these deductions and exemptions, the person’s taxable income will be Rs. 15, 00,000. But thanks to lower tax rates, the tax liability will be the same as Rs.1,95,000. Thus, at this break-even level of exemptions, it makes no difference whether the person chooses the old regime or new regime.

Now,

If the same person’s deductions and exemptions increase to Rs. 3,00,000 then his taxable income under the old regime will come down to Rs. 12,00,000 and the tax liability will be Rs. 1,79,400, while under the new regime, the tax liability will be Rs. 1,95,000. So, it will be better to continue with the old regime.

On the other hand, if the person’s exemptions are only Rs. 2,00,000, his taxable income under the old regime will be Rs. 13,00,000 and the tax liability will be Rs. 2,10,600. This is higher than the tax liability of Rs. 1,95,000 under the new regime, so it will be worthwhile to shift to the new regime.

How to pick which tax regime is better?

This table would help you understand which tax regime is beneficial for you.

Assuming, your Annual Income is Rs. 6,50,000/- and you claim deductions of Rs.75,000/- then it does not make any difference if you choose an old or new regime. But if you claim deductions more than Rs.75,000/- then it is beneficial for you to choose an old regime than a new one and vice versa.

To make a well-informed decision you must calculate and check for yourself.  You can try your calculation on https://www.incometaxindiaefiling.gov.in/Tax_Calculator/

Note: It is always advisable to consult with your tax advisor before you take a call.

Happy Investing and Planning!

Leave a Reply

Your email address will not be published.