Which Tax option suits you? Old or New Tax regime

Which Tax option suits you? Old or New Tax regime

Employers have started rolling out investment declaration form and are asking employees to indicate their choice of tax regime. This year, taxpayers are very much confused while making their investment declarations to employers for tax deduction at source. CBDT has issued a circular in 13^th April 2020 directing all employers to obtain a declaration from employees if they wish to opt for the new regime. Now it is becoming a pain for taxpayer to decide whether stick to old regime by claiming tax deduction or claim lower tax rate and forego certain exemptions and deductions.

 New Tax Regime:

 New optional tax regime offer multiple tax slabs with lower rates (as shown in Exhibit 1) than the old regime but most of the deductions are not available (see table in Exhibit 2).

 Exhibit 1: New Tax slab vs Old Tax slab:

Tax Slab	EARLIER RATE	NEW RATE
Up to 2.5 lakh	NIL	NIL
2.5 - 5 Lakh	5%	5%
5-7.5 Lakh	20%	10%
7.5- 10 lakh		15%
10 -12.5 lakh	30%	20%
12.5 - 15 lakh		25%
Above 15 lakh		30%

 Point to be noted: Person having income up to Rs 5 lakh is exempt under both the regime.

 What should one opt?

 Each individual will have to evaluate which regime is favourable to him/her depending on the deductions and exemptions he/she plans to claim. Taxpayers with no housing loan, staying in rent-free accommodation and preferring to make little or no investments may find the new scheme useful. The decreased rates will also give more disposable income in the hands of people who do not want to lock their money in prescribed investments for any reason.

 Based on the comprehensive calculation, any taxpayer claiming more than 2.5lakh deduction in a year (including the 50,000 standard deduction) old scheme is more beneficial for them.

 However, taxpayers should perform a comparative analysis of their tax liabilities under the old and new regime. Taxpayers who claim full deduction for u/s 80C, lives on rent and claim HRA or have taken a home loan would be better off sticking to the older tax regime.

 When to make choice?

Salaries person is allowed to choose between old and new scheme at the time of making their investment declaration to the employer for tax deduction. Once you make the choice, you cannot switch to the other during the rest of the financial year as far as TDS from salary is concerned. However the employee is free to change the option and opt the more beneficial one, at the time of filing the Income-tax return.

 Exhibit 2: Common deductions and exemptions that taxpayers forego under new tax system

DEDUCTION OR EXEMPTION	HOW MUCH IS TAX FREE
Standard Deduction	Flat Rs 50,000 deduction for salaried taxpayers and pensioners.
House Rent Allowance	Least of the following three is exempt from tax: 1. HRA received 2. Actual rent paid minus 10% basic 3. 50% of basic (40% in non metros)
Home loan interest under Sec 24	Up to 2 lakh interest paid on home loan can be claimed as a deduction
Home loan interest under Sec 80EEA	Additional Deduction of upto 1.5 lakhs interest paid on home loan for affordable home.
Tax saving investments under 80C	Deduction of upto 1.5 lakhs if invested in PPF, Life Insurance, NSC, tax saver FDs, ELSS funds etc.
Contribution to NPS under Sec 80CCD(1b)	Upto 50,000/- for investment in National Pension scheme.
Medical insurance under Sec 80D	Rs 25,000 for self and family, Rs 25,000 for parents (Rs 50,000 if parents are senior citizen)
Education loan interest under Sec 80E	Entire interest paid on education loan for self or dependent for a period of 8 years.
Leave travel assistance	LTA can be claimed for 2 travels undertaken within a block of four calendar years.