Whether the new income tax regime works for you or the old one will depend on composition of your income and deductions available
The salaried have the option to choose between both the income tax regimes every year
The ITR filing season has set in. This is the first year to choose, between the old tax regime with deductions and exemption and new tax regime without deductions and exemption but with lower slab rates, while filing your ITR. Taxpayer are confused as to which one to opt for. Let us broadly discuss the features of both the regime.
The option of new tax regime is available to all individuals and HUFs. This is optional. Under the new tax regime tax is payable at lower slab rates on the income up to Rs. 15 lakh as compared to old regime. Under the new regime tax slabs rates of 5%, 10%, 15%, 20% and 25% are applicable on each successive increase of Rs. 2.50 lakh starting from the basic exemption of Rs. 2.5 lakh till 15 lakhs of total income.
If you wish to opt for the new tax regime you have to forgo various tax deductions and exemptions otherwise available under old regime. Under the new tax regime, salaried people cannot avail major benefits of items like standard deduction, House Rent Allowance (HRA), Leave Travel Assistance (LTA) and even some of the allowances allowed for performing duties. Various deductions like those available under Section 80 C (comprised of various items like EPF, LIP, School Fee, PPF, NSC, ELSS, home loan repayment etc.) , 80D (for health insurance premiums) , 80 CCD(1) & 80 CCD(1B) (for NPS) will also not be available to both categories of taxpayer i.e. salaried and self-employed. You also forfeit the claim for home loan interest for self-occupied as well as to set off or carry forward the loss in respect of let out property. You also will not be able to set off any brought forward losses against current income under new scheme.
Likewise retired senior citizen cannot claim standard deduction against pension received by them in respect of their past employment. Deduction up to Rs. 50,000 available to senior citizen for interest from post office and banks u/s 80TTB will also not be available.
How the scheme works
As one can claim various exemptions and deduction and the composition of these tax benefits widely differ from person to person, a readymade comparative calculation chart cannot be given as to depict which regime is beneficial. However, looking at the tax benefits which majority of the taxpayer have to forgo, the benefits available with existing regime outweigh the benefits of lower rates of tax by migrating to new regime. Let us try to understand the implications with examples.
First let us take case of a salaried person. Since majority of salaried either claim benefit of HRA for rent paid or in all probability would have bought a house with home loan. Presuming he has bought a house with home loan, he has to forgo home loan benefits for interest as well as principal repayment for 3.50 lakh taken together comprised of 1.50 lakh under Section 80C for principal prepayment and Rs. 2 lakh for home loan interest for self-occupied house property. After taking into account the fact that he also will have to forgo standard deduction of Rs. 50,000/-, he will have to forgo to deduction of Rs. 4,00,000/- resulting in tax impact of Rs. 80,000 if he is in 20% tax slab having income between ₹5 lakh to 10 lakh. The net tax benefit forgone is higher than the tax liability of Rs. 62,500 under new scheme. For those in 30% tax slab the tax effect of the benefit forgone @ 30% would be 1.20 lakh against the tax saving of Rs. 37,500 accruing by opting for new regime.
Now let us take an example for a self-employed person who can avail full deduction under Section 80 C for Rs. 1.50 lakh and for Rs. 50,000/- under Section 80CCD(1B) for contribution towards National Pension System for easy understanding of both the regimes. Presuming aggregate income of Rs. 7 lakhs he will have a tax liability of Rs. 32,500/- under new tax regime. However if he is able to claim deduction of Rs. 2 lakhs explained above he will be able to reduce his total income to 5 lakhs on which he will not have to pay any tax due to rebate of Rs. 12,500 available u/s 87A. By investing two lakh rupees one can save Rs. 32,500 of tax under the old regime.
Why will people not opt for new tax regime
Since salaried have to forgo various benefits like standard deduction, HRA, LTA and there would be many mandatory items like employee provident fund contribution, life insurance premium, school fee, home loan principal repayment, it will make sense for most of the salaried to stay with old regime. Even for self employed tax payers who have a home loan running it does not make any sense to switch to the new regime.
In my opinion the new tax regime is only useful for those who have liquidity problem and are not able to avail full benefits of Section 80 C and who do not have any health insurance as well as do not have any home loan running. The new regime may be suitable for only a handful of self-employed or an HUF for which rebate under Section 87A is not available.
Switching from one regime to another
The salaried have the option to choose between both the regimes every year. Even if you have opted a particular tax regime with your employer, you can still choose the other regime while filing your ITR in case the other option seems more beneficial to you while computing the tax liability at the time of filing the ITR.
Please note that the self-employed do not have the choice to come back to old tax regime once the new one is opted unless they stop having business income. So the person with business income has to be vary careful while migrating to new regime as it is only one way journey for them.
Whether the new scheme works for you or the old one will depend on composition of your income and deductions available and one will have to take decision based on his circumstances.
