Make an evidence-based choice between the old and new income tax regimes

Those who can cross certain thresholds of deduction will be better off sticking to the old regime

An account specialist with a Mumbai-based advertising agency, who did not wish to be named, aims to buy a house in the city in the future. She is in her thirties and currently earns a salary of Rs 6.05 lakh. Since she is keen to avail of all possible tax deductions, she is reluctant to move to the new concessional tax regime ushered in by the finance minister in Budget 2020. Nonetheless, she is eager to learn which regime – the old one with higher tax rates, or the new one with lower rates but without deductions – would be the smarter choice for her.

A simpler regime: The key advantage of the new tax regime is that it provides for concessional tax rates compared to those prevailing under the old regime. "A new tax slab of 10 per cent has been introduced for income between Rs 5 lakh and Rs 7.5 lakh, and earlier tax rates have also been lowered," says Sameer Jain, founder and managing partner, PSL Advocates & Solicitors. The new tax regime will put greater liquidity in the hands of taxpayers.

To avail of deductions under the old regime, taxpayers had to submit proof of investment and expenses (in the case of reimbursements). They will be saved from all that trouble under the new regime. "The documentation required will be lesser here, making tax filing a lot easier," says Suresh Surana, founder, RSM Astute Consulting Group.

The old regime forces taxpayers to invest in specific instruments on which deductions are available. Not all of them are optimal choices for wealth creation. Many less-informed taxpayers are mis-sold products that allow them to avail of tax deduction, but give very poor returns even over very long durations. Taxpayers who move to the new tax regime will be able to choose products based purely on the criterion of whether they can help them create wealth.

All tax-saving investments come with a lock-in. The Public Provident Fund (PPF) has a lock-in of 15 years, the five-year tax saver fixed deposit and National Savings Certificate (NSC) have a lock-in of five years, Equity Linked Savings Schemes (ELSS) have a lock in of three years, and so on. Taxpayers moving to the new tax regime will be able to avoid the loss of liquidity in such instruments.

On the flip side, taxpayers who choose the new regime, will have to do without the long list of deductions that were available under the old. These include taxpayers' favourites such as Section 80C (Rs 1.5 lakh), Section 80CCD(1B) offering deduction of Rs 50,000 on National Pension System (NPS), deduction of Rs 2 lakh on housing loan interest under Section 24, and several others. Only a few tax deductions will be permitted under the new regime, such as employer contribution to NPS.

The benefit from shifting to the new tax regime is capped at Rs 75,000. "Unlike the corporate concessional tax regime, which reduces tax rates across income levels, the concessional tax regime for individuals has limited application, especially for people in the highest tax bracket, who will continue to pay an effective tax rate of 42.7 per cent," says Surana.

Maximisation of tax benefits possible under old regime: The primary benefit of the old regime is that an employee's salary can be structured in a manner that allows him to maximise deductions and save taxes. People living on rent get to avail of deduction under House Rent Allowance (HRA). Many taxpayers religiously go on trips with their families twice in a block of four years to avail of Leave Travel Allowance (LTA).

The old tax regime also helps inculcate a saving and investment culture. "People combine tax savings with creating a corpus for long-term goals by investing in products like the PPF," says Archit Gupta, founder and chief executive officer, ClearTax.

On the flip side, the old tax regime is more complex and requires a certain level of understanding and diligence to maximise the benefits available under it. As mentioned earlier, tax-saving instruments come with a lock-in. "Categories like senior citizens may prefer to have liquidity in their hands,” says Surana. The old tax regime also requires taxpayers to retain their proof of investments, in case they are called up for an assessment proceeding by the tax authorities.

What should you do? 

Both the regimes have their merits. Some younger taxpayers, who do not want the hassle of investing in tax-saving instruments, and want more money in their hands, may opt for the new tax regime. All others should carry out a careful assessment before making the choice. "Our analysis shows that there are various thresholds or break-even points of deductions for taxpayers at different income levels. If they can cross those levels, then it would make sense to stick to the old tax regime," says Gupta (see table on breakeven points).

Senior citizens and very senior citizens enjoy higher exemption levels of Rs 3 lakh and Rs 5 lakh under the old tax regime. They are also able to avail of a host of other deductions, such as Section 80C, Section 80D (of Rs 30,000 on health insurance), Section 80TTB (of Rs 50,000 on interest income), and so on. They should carefully assess their situation before choosing between the two tax regimes.

Use this tax calculator, provided by the income-tax department, to make a logical, numbers-based choice.

Finally, remember that by opting for one of the tax regimes, individual taxpayers don’t get locked into it forever. They retain the option to switch between the two every year. But those with business and professional incomes will have to choose and subsequently stick to one regime.

Youngsters speak

 

Anisha Diwakar, 32

Job profile: Exec assistant at private firm in Mumbai
 

Annual salary: Rs 6 lakh

Will opt for: Old regime

“I find the new tax regime attractive as it eliminates the need for extra compliances. However, I will wait to see how it pans out.”

Kushagra Kunwar Bhatnagar, 28

Job profile: Deputy Manager, Digital Marketing in Delhi

Annual salary: Rs. 8.4 lakh

Will opt for: New regime

“I like it for its simplicity. Even if pay slightly more tax, I'd rather invest my after-tax money in instruments best suited for wealth creation.”

L Lohit Kishore

Job profile: Developer at cloud management services firm in Hyderabad 
 

Annual salary: Rs 7 lakh

Will opt for: Old regime

“I've already started tax-saving investments, want to continue with them

Annual income	Tax Liability (excluding surcharge & education cess)
	Under new tax regime		Under existing tax regime*		Benefit under new regime
.	Slab Rates (%)	Under new tax regime (No deduction/exemption available)	Slab Rates (%)	As per existing tax regime*	.
2,50,000	-	-	.	-	-
5,00,000	5%**	-	5%**	-	-
7,50,000	10%	37,500	20%	62,500	25,000
8,00,000

15%  45,000  20%  72,500  27,500 10,00,000  15%  75,000  20%  1,12,500  37,500 12,50,000  20%  1,25,000  30%  1,87,500  62,500

15,00,000 

25%  1,87,500  30%  2,62,500  75,000 50,00,000  30%  12,37,500  30%  13,12,500  75,000 75,00,000  30%  19,87,500  30%  20,62,500  75,000

1,00,00,000 

30%  27,37,500  30%  28,12,500  75,000 1,50,00,000  30%  42,37,500  30%  43,12,500  75,000 2,00,00,000  30%  57,37,500  30%   58,12,500  75,000

3,50,00,000 

30%  1,02,37,500  30%  1,03,12,500  75,000 5,00,00,000  30%  1,47,37,500  30%  1,48,12,500  75,000 5,50,00,000  30%  1,62,37,500  30%  1,63,12,500  75,000 Figures in rupees unless indicated; **No tax up to Rs 5,00,000 taxable income, as rebate under section 87A is available; Source: RSM Astute Consulting Group

If you can cross these thresholds, stick to old tax regime

Income level

Standard Deduction Additional deduction needed 7,50,000 50,000 75,000

10,00,000

50,000 1,37,500 12,50,000  50,000 1,58,333 15,00,000 50,000 2,00,000 Figures are in rupees and apply to someone who is less than 60 years old. Source: Cleartax