Which is the best tax regime currently? The newer regime or the older one? This is a question that is currently foremost on the minds of investors. Before filing ITR (income tax returns), you should be clear about which regime you prefer and why. While we all know quite a bit about the older tax regime, it is pertinent to mention the benefits and features of the newer system vis a vis the former one.
Here are some key details regarding the new tax regime:
- The new tax regime can be availed by all HUFs (Hindu Undivided Families) and individuals. This is an optional affair.
- Under this new tax regime, you will have to pay income tax at comparatively lower slab rates on income up to Rs. 15 lakh in comparison to the previous regime.
- Under the aegis of the new tax regime, you will have tax slab rates of 5%, 10%, 15% and 20% along with 25%. This applies on every successive increase of Rs. 2.50 lakh from the basic Rs. 2.5 lakh exemption until Rs. 15 lakh in total income.
- If you wish to choose the new regime, you will have to do without numerous tax deductions and other exemptions which are normally provided in the older tax regime. You can use a tax calculator for working out the same before anything else.
- Under the new regime, you cannot avail of standard deduction, HRA (House Rent Allowance), LTA (Leave Travel Assistance) and other allowances. Other deductions under Section 80C, including those on PPF, EPF, school fees, LIP, home loan repayment, NSC, ELSS and 80D for health insurance premiums will not be available. Deductions under 80 CCD (1) and 80 CCD (1B) for NPS will also not apply. You cannot claim home loan interest payment for self-occupied homes or carry forward/set off losses with regard to property that has been let out. You will not be able to set off losses brought forward against current income under the new tax regime.
- Senior citizens will be unable to claim standard deduction against pension and also the deductions up to Rs. 50,000 for post office interest and banks under Section 80TTB.
How this new regime basically functions
Since people can claim multiple deductions and tax exemptions, the scale of benefits under the new and old tax regimes will vary from one taxpayer to another. Suppose there is a salaried taxpayer and the majority of these professionals claim HRA benefits for rent paid or may have bought a home with a home loan. Assuming the latter, the loan benefits for interest and principal repayment up to Rs. 3.50 lakh will have to be skipped in the new regime (Rs. 1.5 lakh for principal under Section 80C and Rs. 2 lakh for interest under Section 24). Standard deduction of Rs. 50,000 will be lost, making the total deduction at Rs. 4 lakh. The tax impact will be Rs. 80,000 if the person falls in the 20% income tax bracket, earning Rs. 5-10 lakh annually. The net tax benefit lost is higher than tax liabilities of Rs. 62,500 under the new scheme. For people in the 30% bracket, the benefits foregone will be Rs. 1.20 lakh as compared to savings of Rs. 37,500 under the new scheme.
Suppose someone is self employed and getting full deduction up to Rs. 1.5 lakh under Section 80C and Rs. 50,000 under Section 80CCD (1B) for contributing to NPS. Taking approximate income of Rs. 7 lakh, the tax payment will be Rs. 32,500 in the new regime. However, claiming deductions of Rs. 2 lakh will help in lowering overall income to Rs. 5 lakh in the old regime and he/she will be paying zero taxes owing to rebate of Rs. 12,500 available under Section 87A. By investing Rs. 2 lakh, he/she can save tax of Rs. 32,500 under the older tax regime.
Hence, salaried professionals will have to skip numerous exemptions including LTA, HRA and standard deduction along with home loan principal repayment, school fees, life insurance premiums (LIP), EPF contribution and so on. Most people will stay under the aegis of the older tax regime, particularly those who have home loans to repay. The new tax regime is useful for people who have issues with liquidity and cannot fully avail of the benefits under Section 80C along with those not having home loans or health insurance. The new regime is thus suitable for some self employed people or HUFs who do not get rebates under Section 87A. Salaried professionals can choose between these two regimes annually. Self employed professionals can only choose once and they cannot switch unless they stop earning business income. Make the choice carefully and only after computing the costs and benefits in both cases.