New Vs Old Tax Regime: Taxpayers can avail various deductions and exemptions available under the old tax regime, while there are no such benefits offered under the new tax regime, except for the Standard Deductions worth Rs 75,000.
New Tax Regime Vs Old Tax Regime: The Centre in the July Union Budget introduced some changes in the new tax regime, increasing Standard Deduction by Rs 25,000 to Rs 75,000 and tweaking the slab. There are no changes made in the old tax regime, which offers taxpayers benefits in form of deductions and exemptions. So, have the recent changes in the new tax regime made it more attractive for taxpayers?
In this article, we will try to understand which income tax regime is better for you if you earn Rs 10 lakh annually.
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Tax deductions and exemptions under old tax regime:
The old tax regime allows various deductions and exemptions to be claimed by taxpayers. If you plan your investment carefully you can benefit from deductions under Section 80C (up to Rs 1.5 lakh), 80D (for health insurance premiums), and the standard deduction of Rs 50,000, among others. These deductions can significantly lower your taxable income, making this regime potentially more beneficial if you actively utilise these provisions.
Let’s understand from this calculation how much you tax you can save on an annual income of Rs 10 lakh under the old tax regime, if you plan your investment prudently.
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Deductions available under the old tax regime:
Standard Deduction: Rs 50,000
Section 80C Deductions: Rs 1,50,000
Section 80D (Health Insurance Premium): Rs 25,000
Total Deductions Available: Rs 2,25,000
Taxable Income: Rs 10,00,000 – Rs 2,25,000 = Rs 7,75,000
Tax Calculation:
Up to Rs 2.5 lakh: NIL
Rs 2.5 lakh – Rs 5 lakh: 5% of Rs 2.5 lakh = Rs 12,500
Rs 5 lakh – Rs 7.75 lakh: 20% of Rs 2.75 lakh = Rs 55,000
Total Tax: Rs 67,500
Rebate under Section 87A: Nil (since taxable income is above Rs 5 lakh)
Health and Education Cess (4%): Rs 2,600
Total Tax Payable: Rs 70,100
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New Tax Regime – Lower tax rates but no deductions:
As mentioned above, taxpayers do not get any deduction or exemption benefits, except for the Standard Deduction, under the new tax regime. However, the new tax regime offers lower tax rates.
Now, let’s take an example with a calculation showing how much an individual with an annual income of Rs 10 lakh will pay in income tax under the new tax regime.
New Tax Regime:
No deductions / exemptions are available.
Tax slabs under the new regime are different:
Total Income: Rs 10 lakh
Standard Deduction: Rs 75,000
Taxable Income: Rs 9.25 lakh
Tax Calculation:
Up to Rs 3 lakh: Nil
Rs 3 lakh – Rs 7 lakh: 5% of Rs 4 lakh = Rs 20,000
Rs 7 lakh – Rs 9.25 lakh: 10% of Rs 2.25 lakh = Rs 22,500
Total Tax: Rs 42,500
Rebate under Section 87A: Rs 12,500 (Not applicable as income is more than Rs 7 lakh)
Health and Education Cess (4%): Rs 1,700
Total Tax Payable: Rs 44,200
Comparison:
Old Regime Tax Payable: Rs 70,100
New Regime Tax Payable: Rs 44,200
The old tax regime offers a higher tax liability of Rs 70,100 compared to Rs 44,200 under the new regime on an annual income of Rs 10 lakh, despite deductions available under the former.
