In Budget 2020, Nirmala Sitharaman, the finance minister, announced a new tax system with more tax slabs and lower tax rates. The majority of taxpayers have long requested this, but there is a catch: all deductions and exemptions from the previous tax system must be removed.
The finance minister added to the confusion by giving taxpayers the option of choosing between the new regime and the existing one, leaving it up to them to make their own decision. Due to the combined factors of all these variables, tax rules have become more complicated rather than simpler.
And if you’re wondering how to decide whether to choose the new or the old tax regime, this blog provides the information you need. We look at the new regime carefully, weigh its advantages, and compare it with the current tax structure. So, let’s begin.
More tax slabs and a lower tax rate, but no option to lower taxes under the new tax regime.
The new tax system differs from the previous one in two ways.
One, under the new system, there are more tax brackets with reduced rates for incomes under Rs. 15 lakh. Two, the new regime won’t offer all the exemptions anddeductions that taxpayers used under the old one.
Here is the comparison between the old and new tax slabs:
|Tax Slabs||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%|
As you can see, the new system will impose a 10% tax on income between Rs. 5 lakh and Rs. 7.5 lakh and a 15% tax on income between Rs. 7.5 lakh and Rs. 10 lakh. This was 20% flat across the whole range for the existing regime. The previous Rs. 10 lakh+ slab where you paid 30%, has now been broken into three parts with rates of 20% for Rs. 10-12.5 lakh, 25 % for Rs. 12.5 lakh-15 lakh, and then 30 % for Rs. 15 lakh and above.
High Rates under the Old Tax System, but Many Ways to Reduce Taxes
The current tax system is a little complicated, to say the least. Despite the high tax rates, there are many strategies to lower your tax obligation.
Over the years, the government has provided Indian taxpayers with over 70 exclusions and deduction options through the addition of sections to the Income Tax Act, allowing them to reduce their taxable income and hence reduce their tax obligations.
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 taxable income by Rs. 1.5 lakh. Apart from this, there are various other provisions that permit you to deduct taxes for expenses like health insurance premiums and loan interest on both home and education loans.
Your taxable income may be reduced by lakhs as a result of a mix of exemptions and deductions. To keep your taxable income at a minimum, you must, nevertheless, find strategies to optimise your wages and savings/investments each year.
What should you choose the old income tax and the new tax regime?
Sadly, there isn’t one answer to this. The intricacy of Indian tax laws is more to blame.
Although the tax rates have been reduced, the new system appears to be superior at first glance. However, with these reductions, someone making Rs. 7.5 lakh in income will have to pay Rs. 25,000, while those making Rs. 10 lakh in income will save Rs. 37,500 in taxes.
You will have to give up all the exemptions and deductions that could make these savings ineffective. Even while deciding between the old and new tax regimes could seem tough, if you go about it methodically, it is not that difficult to decide.
At the beginning of the financial year you need to communicate to your employer your intention to choose new tax regime for your personal income tax. The employer will then wouldn’t ask you the tax saving investment details, he calculate and deduct tds as per new regime. At the time of filing of your ITR you may re-decide about your choice. If you want to continue with the old regime, you may claim tax saving deductions and other benefits and claim refund of tax or pay differential liability as the case may be. This option is available in the first year till you choose the new regime. Once you choose new regime of tax, it is for lifetime. The reverse way is not possible.
Get assistance from a qualified tax adviser if you’re still unsure of which tax structure, as a salaried person, you should choose. You may have the assurance that your taxes are filed correctly by having a Tax Adviser by your side, and Digilekha Consultancy unquestionably gives you that assurance in Aundh- Baner, Pune, we are the top tax consultants. For any accounting or consulting needs, contact us right away.