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Old vs New Income Tax Regime – Things You Need to Know

Old vs New Income Tax Regime – Things You Need to Know

Income Tax System in India

Budget 2020 introduced a new personal income tax regime for individual tax payers with lower tax rates but more tax slabs. Also, it removed all available deductions and exemptions. The Finance Minister gave tax payers an option to choose between the new regime and the old one, which in fact made the whole process seem complex. Understanding income tax can often be overwhelming for tax payers, and a lot of factors can even make it confusing. For instance, several people tend to end up calculating wrong deductions by deducting the allowable deductions from total tax liability instead of their Gross Total Income. This article intends to explain the older tax system and compare it with the new regime in the most layman manner possible.

Advantages of the old tax system:

India's gross savings rate was approximately 30% in March 2019 and domestic savings was a significant contributor to the overall rate. This was because, the old income tax regime helped promote savings for any future eventuality like marriage, education, purchase of house property, medical exigency, etc. by enforcing investments in specified tax-saving instruments like ULIPs, which over a period inculcated the savings culture in individuals. So, if more individuals will opt for the new regime, the savings rate would decrease. Nevertheless, the consumption cycle and demand would be revived.

Advantages of the new tax system:

The new regime offers reduced tax rates and compliances. Also, as most of the exemptions and deductions are not available, tax filing becomes simpler as there is lesser documentation required. Moreover, the reduced tax rate provides more disposable income to people who could not invest in specified instruments due to certain financial or personal reasons. Therefore, offering increased liquidity in the hands of the taxpayers and allowing the flexibility of customizing the investment choice.

Investor may not prefer to lock-in funds in the prescribed instruments for the specified period: Under the new regime, all taxpayers would be treated at par because the benefit of deduction/allowance does affect tax liability. This can be especially helpful for taxpayers who may not subscribe to the specified modes of investments, as most of these investments have a lock-in period. They can instead invest in open-ended instruments, which provide them good returns as well as the flexibility of quicker withdrawal.

Indian Tax System

Which tax system is better?

For income segments up to Rs 15 lakh, the New Tax Regime has proposed lower income-tax rates but only at the cost of you giving up exemptions and deductions available under various provisions of the Income Tax Act. This means you will have let go of some exemptions including Leave Travel Allowance (LTA), House Rent Allowance (HRA), and deductions available including Insurance Premium payout and Savings Account Interest under chapter VI A of the IT Act Section 80 such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G, 80GG, 80GGA, 80GGC, etc.



Even the standard deduction of Rs 50,000 under Section 16 available to salaried individuals and the deduction on home loan interest, under Section 24(b) will not be allowed. However, the deduction under Section 80CCD (2), which is employer’s contribution on account of an employee in a notified pension scheme and Section 80JJAA for new employment can be claimed.

Therefore, it is very clear that the changes introduced don’t make things easier for tax payers. One shall deeply understand both the sides before choosing the regime which is most beneficial for them. The older regime will work in the interest of your financial wellbeing if you are looking to fulfill your financial goals like wealth creation through investments in tax-saving instruments, paying premiums to meet health and life insurance needs, paying children’s school fees, buying a house with a home loan, etc. On the inverse, the new regime will do well to someone who is not intending to invest major amounts in tax saving plans.

Speak to an insurance specialist now!

FAQs Related to Tax Saving

First of all, your gross total income is taken into account and all applicable deductions/exemptions are deducted out of it, the resultant amount is the net income, upon which the Income Tax is calculated, on the basis of income tax slabs that are announced each year in the Union Budget.

How much tax you can save depends on your financial portfolio and profile. The most common avenue for tax-saving is Section 80C, which allows you deductions up to Rs 1.5 lakh in your taxable income. The implication is that you can save up to Rs 46,800*in taxes in a year, depending upon the income tax slab you belong to. Similarly, other avenues like interest on loans, health insurance etc also provide deductions capped at a certain amount.

*Tax saving of Rs.46,800/- is calculated at the highest tax slab of 31.2% (including 4% Cess) for an individual assessee on life insurance premium of Rs.1.5 lakh, who is having taxable income upto Rs.50 lakhs.

You can choose from many investments that are tax-exempt: not an exhaustive list, but includes Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), life insurance plans, Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), tax-saving bank FDs.

First of all, make investment of Rs 1.5 lakh in investments instruments covered under Sections 80C to reduce your taxable income. Claim deductions for the interests paid on home loan and/or education loan if any. Get a health insurance policy and claim for other medical expenditure like preventive medical healthcare check-up, expenditure on rehabilitation of handicapped dependent relative, among others. Mainly, the idea should be finding out which tax saving avenues fit well with your larger financial goals and invest in them!

The maximum limit of investment that will reap the benefits of deduction from taxable income under Section 80C is Rs 1.5 lakh.

There is no limit to the number of tax-exempt investments one can have in a financial portfolio. However, it is important to note that there is a limit to how useful any instrument can be for the purpose. This is because the amount of deduction that can be claimed for specific instruments is capped at a maximum value. At the same time, keep your financial portfolio balanced so that it also provides safety, returns and liquidity.

First of all, make use of the Rs 1.5 lakh deduction allowed under Section 80C. This can be done by making investments in life insurance premium, Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), Unit Linked Insurance Plans (ULIPs), Sukanya Samriddhi Yojana, Senior citizens Savings scheme, National Pension Scheme (NPS), among others.

Second, make use of the deductions available in respect of health insurance and other medical expenses. Under Section 80D of the Income Tax Act, 1961, a deduction of up to Rs 25,000 is allowed in a year in terms of the premium paid towards a health insurance policy of Self and your family i.e., Spouse and children. This can include preventive healthcare check-ups too upto Rs 5000/-. Under section 80D you can also claim additional deduction upto Rs. 25000/- (Rs. 50000 in case of senior Citizen) for health insurance of your parents.

Apart from Section 80C, various deductions and exemptions has been provided under the provision of Income Tax Act, 1961 like deduction under section 80D can be claimed for the payment of health insurance, deduction upto Rs 50,000 on home loan interest under Section 80EE. Any donations you make to charitable institutions are also allowed as deduction under Section 80G, subject to condition prescribed therein.

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