“...Currently the Income Tax Act is riddled with various exemptions and deductions which make compliance by the taxpayer and administration of the Income Tax Act by the tax authorities a burdensome process...”
Thus spake Finance Minister Nirmala Sitharaman before spelling out the new optional tax regime. The new rates, as mentioned by the FM, are significantly lower than the old ones.
The catch, however, is that taxpayers who opt for the new regime will have to forego a number of tax exemptions and deductions, including those on house rent, PF, health insurance, LTA and home loan.
So, what’s your best bet? To stick to the old regime? Or, to opt for the new one? The Quint crunches the numbers to give you an idea:
To start with, here’s a lowdown on how the old and new tax slabs look like:
To put things simply, whether or not the new tax regime will put more money in an individual’s hands depends on the deductions and exemptions one used to avail under the old regime.
Naturally, the benefits or the lack thereof under the new slabs will vary on a case-to-case basis. Here, The Quint breaks down the best case scenarios under both the regimes.
In Case of Exemptions Under Section 80C Only
The most common exemption availed by taxpayers is under Section 80C which includes investments in Provident Fund, National Pension Scheme, Life Insurance Premium etc.
A taxpayer can claim a deduction of up to Rs 1.5 lakh of his/her total income under the section.
Now, if an individual’s taxable income is up to Rs 5 lakh, they do not need to pay any tax.
If, however, their taxable income is Rs 7.5 lakh and they avail of Section 80C, they will be taxed upon Rs 6 lakh. Here’s how the scenarios will play out under new and old regime:
SCENARIO 1: UNDER OLD REGIME
Under the old regime, of the total taxable income of Rs 6 lakh, no tax will be levied on an income up to Rs 2.5 lakh; a 5 percent tax will be levied for the next Rs 2.5 lakh and a 20 percent tax on the remaining Rs 1 lakh.
On top of this, a 4 percent cess will be levied on the total tax.
Therefore, in this case, the total tax the individual needs to pay will amount to Rs 33,800.
SCENARIO 2: UNDER NEW REGIME
Under the new regime, the taxpayer will not be able to avail of any exemption under Section 80C.
Now, since there is no tax in the new slab on an income up to Rs 5 lakh, the individual would pay a 10 percent tax on the remaining Rs 2.5 lakh of their income, while the 4 percent cess on total tax would remain.
Therefore, in this case, the total tax that the individual needs to pay will amount to Rs 26,000.
Here’s how the calculations pan out for the other income slabs.
In Case of Exemptions Under Section 80C, 80D, Standard Deduction & House Loan
As made clear above, if the individual’s annual income is about Rs 7.5 lakh or more, they will be better off opting for the new tax regime, in case they are availing of exemption only under Section 80C.
However, the situation alters significantly, if they choose to avail of other common exemptions such as those provided under Section 80D (premium paid on medical insurance), standard deduction and house loan interests.
Now, an individual can avail of exemption up to Rs 1.5 lakh under 80C; Rs 50,000 under 80D; Rs 50,000 under standard deduction and Rs 2 lakh on house loan interest. Thus, a total exemption of Rs 4.5 lakh can be availed of.
Similarly, if an individual's taxable income is Rs 7.5 lakh and they avail of the full exemption of Rs 4.5 lakh, here’s how the two scenarios ie, under the old and the new regime, will play out:
SCENARIO 1: UNDER OLD REGIME
Under the old regime, after exemption, the taxable income will come to be Rs 3 lakh and hence, the individual will not have to pay any tax.
SCENARIO 2: UNDER NEW REGIME
The individual will not be eligible to avail of any exemption. Thus, they will have to pay a 10 percent tax on the remaining Rs 3 lakh, beyond the non-taxable Rs 5 lakh slab.
Additionally, the individual is liable to pay a 4 percent cess on the total tax.
Therefore, in this case, the total tax the individual needs to pay will amount to Rs 31,200.
Here’s how the calculations pan out for the other income slabs.
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