Difference between Old Tax Regime and New Tax Regime
All the salaried people ever since their joining, tend to look for ways to save their hard-earned money. During the filing of their annual Income Tax, all you need to do are to declare some of their eligible investments under the category of 80C or similar. You then will be able to avail yourself of some exemptions and deductions. How you do the declarations, depends on the tax regime.
Till 2020, all the taxpayers were filing under the old tax regime. Afterthe new tax regime was effective from Financial Year 2020-2021, you are given the choice to file your Income Tax according to your choice.
What is the Old Tax Regime?
The old tax regime was in effect since the Income Tax Act of 1961. It allowed an individual to claim for saving money on exemptions, deductions, and allowances on 70 different schemes. You can declare for exemptions by spending on House Rent Allowance, Leave Travel Allowance, Food Coupons or Vouchers, Mobile and Internet service, Standard Deductions of Rs 50,000, Uniform Allowance, Company Lease Car, and Leave encashment, to name a few. You can also opt to save for your future by declaring for deductions on PPF (Public Provident Fund), ELSS (Equity Linked Saving Scheme), EPF (Employee Provident Fund), Life and Health Insurance Premium, Interest and Premiums on Home Loans, Children Tuition Fees, Investment in NPS (National Pension Scheme), Saving Account Interest and many more.
If you can strategize and declare accordingly, you can save your taxable income by quite some amount. Just by declaring under section 80C, you are entitled to save your income by Rs 1,50,000. However, the tax slabs were on the higher side.
In the Union Budget 2020, a new regime tax slab was introduced in which tax benefit is not applicable.
All we need to know about New Tax Regime
The New Tax Regime was introduced by Finance Minister Nirmala Sitharaman on 1st February 2020. In this tax regime, you can declare your expenditures based on the new regime tax slab. The bottom line is, if you earn more, you have to pay more.
Some important exemptions which are retained are Income from Life Insurance, Agricultural Income, Deduction on Rent, Retrenchment compensation, leave encashment on retirement, VRS amount up to Rs 5 lakhs, Death cum retirement benefits and Monetary benefits as Scholarships.
Senior Citizens above 75 years of age are exempted from Income Tax filing.
Comparison between the Old and New Tax Regime
Let us see the difference between the old and new regime tax slab:
|Annual Income||Old Tax Regime||New Tax Regime|
|Under Rs 2.5 lakhs||Nil||Nil|
|Rs 2.5 – 5 lakhs||5%||5%|
|Rs 5 – 7.5 lakhs||20%||10%|
|Rs 7.5 – 10 lakhs||15%|
|Rs 10 – Rs 12.5 lakhs||30%||20%|
|Rs 12.5 – 15 lakhs||25%|
|Rs 15 lakhs and above||30%|
From the table, it can be easily deduced that for every income group, according to the new regime tax slab, there is a certain interest rate that is payable by the individuals. Whereas in the previous tax regime, the interest slab catered to a wider range.
Above Rs 15 lakhs, both the new and tax regime yield the same amount liable for tax.
|INCOME||OLD REGIME||NEW REGIME|
|Tax Interest Rate||Tax||Tax Interest Rate||Tax|
|Under Rs 2.5 lakhs||0||0||0||0|
|Rs 2.5 – 5 lakhs||5%||Rs 12,500||5%||RS 12,500|
|Rs 5 – 7.5 lakhs||20%||Rs 50,000||10%||Rs 25,000|
|Rs 7.5 – 10 lakhs||20%||Rs 50,000||15%||Rs 37,500|
|Rs 10 – Rs 12.5 lakhs||30%||Rs 75,000||20%||Rs 50,000|
|Rs 12.5 – 15 lakhs||0||0||25%||Rs 62,500|
|Sum||Rs 1,87,500||Rs 1,87,500|
|Health & Education Cess||4%||Rs 7,500||4%||Rs 7,500|
|Tax payable||Rs 1,95,000||Rs 1,95,000|
Let us check the Annual Income of Rs 15 lakhs and above with maximum exemption to check the taxable amount according to the old Tax Regime.
|Annual Income||Rs 15,00,000|
|Exemptions under section||80 C||Rs 1,50,000|
|80 CCD (1B)||Rs 50,000|
|80 D||Rs 75,000|
|Taxable Income||Rs 12,25,000|
Which tax regime is beneficial?
No one can truly say which tax regime is beneficial. In the older tax regime, you are required to invest so that you can claim tax benefits. In the newer tax regime, your take-home salary is more as there are limited tax benefits on long-term investment. Hence, there is also no need to provide documentation as proof of the investment.
For the newer generation, who just started their career, the newer tax slab is beneficial for them as they do not have much savings either. The high-income earners find the older tax slab beneficial. Taxpayers belonging to the middle class have benefitted the most from the newer slab.
A comparative study of both models is suggested as you cannot toggle between the old tax regime and the newer tax regime. Your decision will be frozen for the whole financial year.
In the newer future, a simpler tax income system will be implemented.
In case you are facing a cash crunch, you can avail personal loan too for your investment. Do check out the personal loan webpage (https://www.piramalfinance.com/personal-loan) of Piramal Finance. They provide quick loans starting at Rs 1 lakh at minimal documentation.
Choose flexible EMI at an interest rate of 12.99% and above at a repayment tenure ranging from 12 months to 60 months. Do you know the best part; you are eligible for a personal loan above Rs 10 lakhs in case you make your working spouse or blood relative a co-applicant. Do check the Piramal Finance website for more such products and services.
Also Read: Good Reasons To Get Personal Loan In India
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