Old Income Tax regime or new? Which one should you choose while filing IT returns?

With Income Tax return due dates inching closer, you have a choice between the old and the new tax systems. So, which one should you choose while filing your IT returns?

 |  6-minute read |   13-12-2021
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You have been sharing your financial data with your CA for the last couple of days and your CA just called to tell you that she wants some more data. She is working hard to manage your taxes and get you the best computation, so that you can pay less and save more. The last date to file your Income Tax returns is inching closer: it is December 31.

You can’t stop thinking: But why exactly is she taking so much time this year? Sab same hi to hota hai har saal. You have heard her babble something about a new tax system that has come in and is effective now, and how she has to spend more time compared to earlier. Pehle ka kaam to tha hi, but now she has to also check if the previous system works well for you or the new one is better. 

Photo: Getty ImagesPhoto: Getty Images

Here’s what you need to know:

If your income is up to Rs 15 lakh or if you do not invest much in tax-saving schemes, the new tax regime will be better for you. But if you are a high-income earner (i.e., you earn more than Rs 15 lakh), the old regime might be better for you. If your income is Rs 15 lakh, and you opt for the new tax rate system, you can save up to a maximum of Rs 75,000. What’s the maximum loss you might have to incur if you opt for the new scheme? It is infinite.

To find out which tax system is better for you, you just need to consider 3 main factors:

  1. Tax rate,
  2. Gross Total Income
  3. Allowable deduction

A. The annual Tax payable comes from: Net Taxable Income (Rs) * Tax rate (%)

B. The Net Taxable Income comes from: Gross Total Income - Allowable Deductions

Photo: Getty ImagesPhoto: Getty Images

The new tax system reduces the tax rates and thus relieves the tax payer. But the new tax system also reduces the allowable deductions, which makes the tax payer go 'hawwwww'.

Now let’s check the impact of each of the three factors in both schemes:

1. Tax Rates

Old  Scheme

New Scheme

0-2.5 lakh – Nil

0-2.5 lakh – Nil

2.5 lakh-5 lakh - 5% (i.e 5% on 2.5 lakh)

2.5 lakh-5 lakh - 5% (i.e 5% on 2.5 lakh)

5 lakh–10 lakh - 20%  (i.e 20% on next 5 lakh)

5 lakh–7.5 lakh - 10%  (i.e 10% on the next 2.5 lakh)

Above 10 lakh - 30% (i.e 30% on the balance income above 10 lakh)

7.5 lakh–10 lakh - 15% (i.e 15% on the next 2.5 lakh)

 

10 lakh-12.5 lakh - 20% (i.e 20% on the next 2.5 lakh)

 

12.5 lakh-15 lakh - 25% (i.e 25% on the next 2.5 lakh)

 

Above 15 lakh - 30% (i.e 30% on the balance income)

OBVIOUS OBSERVATION:

  1. Income slabs get wider in the old system as tax rates increase. 5% is levied on Rs 2.5 lakh, 20% on the next Rs 5 lakh and 30% on everything above. In the new system, there is a consistent 5% rise with every Rs 2.5 lakh change in slab. This makes the most difference for people with income less than Rs 15 lakh.
  2. Any amount of income above Rs 15 lakh is taxed at the same rate (30%) irrespective of the system. As tax to be paid on income above Rs 15 lakh will be the same, any difference in tax will only arise if income levels are BELOW Rs 15 lakh.

So, let’s check the impact of tax rates in both schemes if your Net Taxable Income is Rs 15 lakh:

Old  Scheme

New Scheme

0-2.5 lakh – Nil (i.e Nil)

0-2.5 lakh – Nil (i.e Nil)

2.5 lakh-5 lakh - 5% (i.e Rs 12,500)

2.5 lakh-5 lakh- 5% (i.e Rs 12,500)

5 lakh–10 lakh - 20%  (i.e Rs 1,00,000 )

5 lakh–7.5 lakh - 10%  (i.e Rs 25,000)

Above 10 lakh - 30% (i.e Rs 1,50,000)

7.5 lakh–10 lakh - 15% (i.e Rs 37,500)

 

10 lakh-12.5 lakh - 20% (i.e Rs 50,000)

 

12.5 lakh-15 lakh - 25% (i.e Rs 62,500)

 

Above 15 lakh - 30% (i.e N/A)

Total: Rs 2,62,500

Total: Rs 1,87,500

In this case, the new regime seems to be better till now because lower rates of tax help in reducing total tax by Rs 75,000 (Rs 2,62,500-Rs 1,87,500) if income is Rs 15 lakh. If your income is less than Rs 15 lakh, then your benefit will be lesser than Rs 75,000.

2. Net Taxable Income

To analyse Net Taxable Income we look at: Gross Total Income which is reduced by Deductions. Gross Total Income pretty much is the same for both regimes. So, that doesn’t change anything. Can we say the same about Deductions? Nope. That is the real game changer.

While the old regime allows tax payers to continue using deductions like HRA and LTA, the new regime forces tax payers to let go of most tax deductions and exemptions that are available under the old regime (approximately 70 deductions).

The new regime doesn’t allow tax payers to deduct expenses like LTA, HRA, standard deduction on salary (Rs 50,000), and interest on housing loans, which salaried employees usually take advantage of, to reduce their tax liability.

What’s more, even deductions for specific investments like 80C, which is paid for Public Provident Fund, principal repayment of home loan, life insurance premium, 80D, 80E are not allowed in the new regime. So how does that look like?

  1. For a salaried employee who has investments and HRA/LTA is applicable:

 

Tax payer in Old Scheme

Tax payer in New Scheme

Gross Income from Salary

18 lakh

18 lakh

Less: Exemptions & Deductions

 

 

Exemption for HRA

(1.2 lakh)

Nil

Exemption for LTA

(50,000)

Nil

Standard Deduction

(50,000)

Nil

Deduction u/s 80 C for EPF, PPF

(1.5 lakh)

Nil

Total Net Income

14.3 lakh

18 lakh

In this example, the old scheme is beneficial for him because he can take advantage of deductions to reduce his net income.

 

2. For a salaried employee who has minimal or no investments and HRA/LTA is not applicable:

  Taxpayer in Old Scheme Taxpayer in New Scheme
Income from Salary 18 lakh 18 lakh
Standard Deduction -50,000 NA
Deduction u/s 80 C for EPF, PPF (1.5 lakh) NA
Total Net Income i.e  Salary 16 lakh 18 lakh
Tax on this: 3,04,200 2,88,600

So, the matter to wonder over is this: What benefits you more? The deductions or the tax rate? Choose wisely.Here, the new regime turns to be better for the tax payer because even when deductions are zero, the lower tax rate benefits the tax payer more than the deductions in the old regime.

By the way, to reiterate, the last date to file your Income Tax returns is December 31, 2021. 

Writer

Akshata Kamath Akshata Kamath @akshispublished

Akshata Kamath is a Digital Storyteller at DailyO. She loves to simplify Finance, Business, Healing and History.

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