If offers lower tax rates but without the benefit of most deductions and exemptions
A phone call between two friends leads to a conversation on the new tax regime that one can choose while filing income tax returns starting from assessment year 21-22.
Karthik: Planning to do some online reading on income tax return filing.
Akhila: Good. Do you know that you can choose to go with either the old or the new tax regime?
Karthik: Yeah. When I glanced at the ITR form, I found a question saying ‘are you opting for new tax regime u/s 115BAC?’ Do you have any idea on what to opt for?
Akhila: If you choose to continue with the existing tax regime, your income – after the benefit of deductions and exemptions – will be taxed at the applicable existing tax rate. While under the new tax regime, your income will be taxed at lower tax rates but without the benefit of most deductions and exemptions.
Karthik: Lower tax rates! Tell me how much lower compared to the old tax regime?
Akhila: Under the old regime, there were only four income slabs. But under the new regime, there are seven. Earlier, income between ₹5 lakh and ₹10 lakh attracted 20 per cent tax. Under the new tax regime, income slabs of ₹5 lakh to ₹7.5 lakh and more than ₹7.5 lakh to ₹10 lakh attract 10 per cent and 15 per cent tax respectively.
Similarly, earlier, income of more than ten lakh was taxed at 30 per cent. You can choose the new tax regime under which an income of ₹10 lakh to ₹12.5 lakh is taxed at 20 per cent, ₹12.5 lakh to ₹15 lakh at 25 per cent and only above ₹15 lakh at 30 per cent.
Karthik: I think I will go for the new tax regime.
Akhila: Don’t get too excited. You have to do some number crunching to decide what suits you best.
Karthik: Ok, tell me what benefits will I forego if I go for the new tax regime?
Akhila: A lot. The popular Section 80C deductions such as investments in provident fund, national pension scheme, expenses towards life insurance premium and home loan principal repayment; section 80D deductions for medical insurance premium; Section 24 deduction for interest paid on housing loan; and exemption of House Rent Allowance or HRA are some of them. Standard deduction and professional tax deduction available for salaried employees along with tax benefits on leave travel allowance (LTA) are others.
Akhila: What is more beneficial – old or new tax regime – depends on a case-to-case basis. So, do your homework.
Karthik: I think I have a bigger task this year. Thanks.