income tax saving: Using only 80C for tax saving? New tax regime may be beneficial for you at this income – The Economic Times

Clipped from: https://economictimes.indiatimes.com/wealth/tax/using-only-80c-for-tax-saving-new-tax-regime-may-be-beneficial-for-you-at-this-income/articleshow/81342868.cmsSynopsis

From FY 2020-21, an individual can continue with the old tax regime and avail common deductions such as section 80C, section 80D etc. of the Income-tax Act, 1961. Else, she/he can opt for the new, concessional tax regime without any commonly availed deductions and tax exemptions.

How much tax you will save by investing in a particular tax-saving financial product will depend on two things – your tax bracket and the income tax regime you opt for.

From FY 2020-21, an individual can continue with the old tax regime and avail common deductions such as section 80C, section 80D etc. of the Income-tax Act, 1961. Else, she/he can opt for the new, concessional tax regime without any commonly availed deductions and tax exemptions.

If you opt for old tax regime
If you opt for the old tax regime, you will be required to invest/spend certain sum on specified instruments to save tax. Here is an example to help you understand how much tax you can save.

Let us say your gross total income for the current financial year 2020-21 is Rs 9.5 lakh. You invest Rs 1.5 lakh in Public Provident Fund (PPF) to claim deduction under section 80C. By claiming deduction of Rs 1.5 lakh, your gross total income will reduce to Rs 8 lakh (Rs 9.5 -1.5 lakh). Now, your tax liability will be calculated on Rs 8 lakh.

By making investment of Rs 1.5 lakh in PPF, you save Rs 31,200 (including 4% cess) in taxes. Had you not invested Rs 1.5 lakh in PPF account, your tax liability would have been Rs 1,06,600 calculated on Rs 9.5 lakh taxable income. By claiming deduction of Rs 1.5 lakh, your tax liability comes down to Rs 75,400 (on Rs 8 lakh taxable income), thus making a tax saving of Rs 31, 200.

Tax saved for every Rs 1.5 lakh tax-saving deduction claimed under Section 80C

Income tax rates	Tax saved (Rs)
At 5 per cent	7800
At 20 per cent	31200
At 30 per cent	46800

(Tax-savings are inclusive of cess at 4 per cent)

Alternatively, suppose your gross total income for FY 2020-21 is Rs 10.5 lakh. By claiming a deduction of Rs 1.5 lakh under section 80C, your net taxable income reduces to Rs 9 lakh. By claiming the deduction, you will now be in the 20% tax bracket instead of the 30% bracket.

The amount of tax saved by you is Rs 36,400 (including cess of 4%). Your tax liability of Rs 1,32,600 on Rs 10.5 lakh income comes down to Rs 96,200.

Income tax slabs under old regime for FY 2020-21
For resident individuals below 60 years of age

Taxable income slabs	Income tax rates and cess
Up to Rs 2.5 lakh	Nil
Rs 2,50,001 to Rs 5,00,000	5% of (Total income minus Rs 2,50,000) + 4% cess
Rs 5,00,001 to Rs 10,00,000	Rs 12,500 + 20% of (Total income minus Rs 5,00,000) + 4% cess
Rs 10,00,001 and above	Rs 1,12,500 + 30% of (Total income minus Rs 10,00,000) + 4% cess

For resident individuals between 60 and 80 years of age (senior citizen)

Taxable income slabs	Income tax rates and cess
Up to Rs 3 lakh	Nil
Rs 3,00,001 to Rs 5,00,000	5% of (Total income minus Rs 3,00,000) + 4% cess
Rs 5,00,001 to Rs 10,00,000	Rs 10,000 + 20% of (Total income minus Rs 5,00,000) + 4% cess
Rs 10,00,001 and above	Rs 1,10,000 + 30% of (Total income minus Rs 10,00,000) + 4% cess

For resident individuals of age 80 years and above (Super Senior Citizen)

Taxable income slabs	Income tax rates and cess
Up to Rs 5 lakh	Nil
Rs 5,00,001 to Rs 10,00,000	20% of (Total income minus Rs 5,00,000) + 4% cess
Rs 10,00,001 and above	Rs 1,00,000 + 30% of (Total income minus Rs 10,00,000) + 4% cess

There are various investment/expenditure options that form a part of the section 80C basket. Some of the commonly used options are Employees’ Provident Fund (EPF), PPF, equity-linked savings scheme (ELSS), 5-year tax saving fixed deposits held with bank or post office. Certain expenses such as principal repayment of home loan, school fees, premium paid on life insurance policy etc. are also eligible for deduction under section 80C within the maximum limit of Rs 1.5 lakh.

Also Read:Investments under Section 80C
Also Read:How section 80C of the Income-tax Act works

Other options apart from Section 80C
There are various sections under the Income-tax Act that can help you save tax apart from section 80C. For instance, section 80D offers deduction on the health insurance premium paid for self, spouse, dependent children and parents.

Maximum deduction of Rs 25,000 can be claimed for health insurance premium paid for self, spouse, and dependent children, if the eldest among these is below the age of 60 years.

Additionally, deduction can be claimed for the health insurance premiums paid for your parents. If your parents are below 60 years of age you can claim additional deduction of Rs 25,000.

On the other hand, if your parents are above 60 years of age, then maximum deduction that can be claimed by you is Rs 50,000 in a single financial year. Similarly, if both you and your parents are above the age of 60 years, then you can claim total deduction of Rs 1 lakh (Rs 50,000 + Rs 50,000) in a financial year.

Let us say you are below 60 years of age and your parents are senior citizens, i.e., age 60 years or more, you can claim a deduction of Rs 75,000 (Rs 25,000 + Rs 50,000) in a financial year. Therefore, if your net taxable income (total income less all the deductions claimed) falls under the tax rate of 5 per cent, then you can save tax of Rs 3,900 (inclusive of cess).

Tax saved via health insurance premium paid for* self and parents

Income tax rates	Tax saved (Rs)
At 5 per cent	3900
At 20 per cent	15,600
At 30 per cent	23,400

(Tax-savings are inclusive of cess at 4 per cent)
*Self, spouse and children below 60 years and senior citizen parents

Similarly, section 80E of the Income-tax Act offers deduction on the interest paid on an education loan without any monetary limit. Section 24 offers deduction on the interest paid up to Rs 2 lakh in a financial year on the housing loan taken.

What if you opt for new tax regime?
If you opt for the new tax regime, then you will not be able to claim the common deductions mentioned above. However, your tax liability will be calculated on the lower tax rates.

Income tax slabs under the new tax regime for FY 2020-21

Income tax slabs	Tax rate
Up to Rs 2.5 lakh	Nil
From Rs 2,50,001 to Rs 5,00,000	5%
From Rs 5,00,001 to Rs 7,50,000	10%
From Rs 7,50,001 to Rs 10,00,000	15%
From Rs 10,00,001 to Rs 12,50,000	20%
From Rs 12,50,001 to 15,00,000	25%
Above Rs 15,00,000	30%

From the example mentioned above, if your gross total income is Rs 9.5 lakh and you opt for the new tax regime, then your tax liability will be Rs 70,200.

Total tax liability under both tax regime for gross total income of Rs 9.5 lakh

Gross total income with tax regime	Tax liability (Rs)
Old tax regime with section 80C deduction of Rs 1.5 lakh	75,400
Old tax regime without section 80C deduction	1,06,600
New tax regime at lower concessional tax rates	70,200

Thus, from the table above, it can be seen that despite getting a deduction of Rs 1.5 lakh under section 80C in old tax regime, an individual is better off in the new tax regime. However, if the person is eligible to claim any other deductions or exemptions, the tax liability may come down further under the old tax regime. Therefore, one should compare the tax liability in the new and old tax regimes before making actual investments.