Individuals have two options for filing their taxes: the new tax regime or the old tax regime. Typically, individuals select the regime where they pay the lowest taxes. The latest budget introduces proposals aimed at making the new tax regime more attractive. Once a person has opted for the new tax regime, they cannot revert to the old tax regime in the future. Hence, the decision to opt for the new tax regime requires careful consideration. Individuals still using the old tax regime need to assess the level of exemptions they require to decide whether to continue with it. In this article, we try to quantify the minimum exemptions individual should be able to claim to continue with old tax regime. However, please bear in mind that we are no tax expert and can not claim that the calculations are fully accurate or we have understood the recent changes fully. The below article and the calculations is just to give a broad idea about the level of exemptions needed. For more accurate suggestion for your particular case, please do your own due diligence or seek expert guidance from people qualified in tax matters.
Incentives to switch from old to new tax regime
The government is trying to incentivize people to move from the old tax regime to the new tax regime, which is supposed to be more simplistic for the taxpayer as well as the government for tax administration. The new tax regime has given a tax bonanza. Now, people with a taxable income of up to 12 lakhs rupees don’t need to pay any taxes. In the new tax regime, income up to 4 lakhs is exempted from income taxes. For the income from 4 lacs to 12 lacs, whatever is the tax amount, it is offset against an equal rebate offered by the government.
New vs old tax regime tax rates
The table compares the tax rates under the new and old tax regimes for different income ranges.
- In the new tax regime:
- Income up to ₹4 lakhs is exempt from tax.
- Income tax up to ₹12 lakhs is offset against an equal rebate given by the government.
- There are more tax slabs in the new tax regime.
- In the old tax regime:
- Income up to ₹2.5 lakhs is exempt from tax.
- Income between ₹2.5 lakhs and ₹5 lakhs is taxed at the rate of 5%
- For income between ₹5 lakhs and ₹10 lakhs, the tax is ₹12,500 plus 20%.
- For income above ₹10 lakhs, the tax is ₹1,12,500 plus 30%.
The new tax regime offers a more straightforward structure with rebates for lower income levels. The old tax regime provides exemptions and varying tax rates based on income brackets.
How much exemptions you need to continue with old tax regime?
We have done the analysis and present how much of a minimum exemption is needed to make the old tax regime the same as the new tax regime. So, if one can claim an exemption higher than the minimum amount required, they can stay with the old tax regime; otherwise, they should switch to the new tax regime.
The table compares the tax amounts under the new and old tax regimes for various income levels, along with the minimum exemption required to break even. For income levels up to ₹10,00,000, the new tax regime does not impose any tax, while the old tax regime requires taxes ranging from ₹12,500 to ₹1,12,500. For income levels above ₹10,00,000, the new tax regime starts imposing taxes, with amounts ranging from ₹60,000 to ₹3,00,000, whereas the old tax regime requires higher taxes, ranging from ₹1,72,500 to ₹5,32,500. The minimum exemption required to break even varies from ₹2,50,000 to ₹7,75,000, depending on the income level. This analysis helps individuals determine which tax regime is more beneficial based on their income and available exemptions.
Exemptions and deductions available in Old tax regime
An individual living in their own home can claim up to 1.5 lakhs under section 80C, 50,000 for NPS, and 25,000 for insurance, totalling 2.25 lakhs. For home loan interest payment on a self-occupied home, an additional 2 lakhs can be claimed. HRA cannot be claimed if living in a self-occupied home. For senior citizen parents, another 50,000 can be claimed. For most salaried individuals, the total exemption thus far is 4.75 lakhs. Higher exemptions can be claimed if residing in a rented apartment to claim HRA. If there is rental income from let out property with heavy interest payments, rental income can be offset against the interest while still claiming a 2 lakh loss from housing property. Thus, the old tax regime may be suitable for those who can claim section 80C, NPS, loss from housing property after offsetting rental income, and HRA.
Conclusion
The choice between the new and old tax regimes depends on an individual’s financial situation and investment strategies. The new tax regime offers a more straightforward structure with rebates for lower income levels, making it attractive for those with fewer investments in tax-saving instruments. On the other hand, the old tax regime provides various exemptions and deductions, making it appealing for individuals who invest in tax-saving instruments or incur significant expenses that qualify for deductions. It is essential for taxpayers to carefully evaluate their financial circumstances and consult with a financial advisor to determine which regime is more beneficial for them.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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