Re-evaluate the tax regime you've chosen if your salary has changed

For different income levels, there are different break-even deduction points. If you can avail of higher deductions than that, stick to the old regime

Owing to the lockdown, cash flows of a large number of companies across sectors have been affected. Many have resorted to salary cuts. Meanwhile, employees will soon need to inform their employers whether they will stay with the old tax regime or adopt the new one. The change in their salary may necessitate a re-evaluation of which tax regime to opt for.   

Nature of pay cuts

The nature of pay cuts undertaken by companies is correlated to their financial situation. “Companies which feel their cash flow mismatch is temporary have gone for deferment of salary while those that are facing a severe cash flow crunch, and which they expect will continue for long, have gone for pay cut,” says Gopal Bohra, partner, NA Shah Associates. He further adds that generally, allowances, bonus, incentives, etc. are reduced while keeping the basic salary intact, as the latter goes into computation of gratuity.        

         

Prashant Singh, business head, compliance and payroll outsourcing, TeamLease Services, too, has a similar view. “Most companies first stopped payment of variables allowances like car allowance, fuel allowance, driver allowance, and reimbursements. This doesn't have a tax impact as many of these perks are exempted from taxation,” he says. 

When pay cuts go beyond tax-exempt allowances, then a taxpayer’s tax liability could change, and he may need to examine afresh which tax regime to go for.  

A more hassle-free regime  

The new regime comes with lower tax rates. Broadly speaking, people in the middle- and lower-income brackets, and those who claim lower tax deductions and exemptions, are more likely to benefit from it. “Due to job losses, salary cuts, lower performance-based incentives, and the continued uncertainty regarding jobs, most households are trying to conserve cash rather than make long-term investments. This has increased the attractiveness of the new tax regime,” says Suresh Surana, founder, RSM India. He adds that the attractiveness will be more for employees earning a total income of up to Rs 15 lakh as the maximum tax benefit that one can avail under the new regime will be limited to Rs. 78,000 at this income level.

The old tax regime comes with a few disadvantages that people can avoid by opting for the new regime. “Tax benefits under the old regime are available on specified instruments which come with lock-in. They may not be preferred by the younger generation which prefers to spend rather than save. These investments may also not suit senior citizens who need liquidity in their hands,” says Kapil Rana, founder and chairman, HostBooks, a start-up that provides automated business solutions for managing accounts and finances. Some tax-saving instruments also give low returns and investors who stay invested in them for long end up paying a heavy price. 

Benefit from deductions and exemptions 

The old regime will be more beneficial for people in the higher income brackets. “There is a class of employees that still has good cash flows, adequate funds for investing, and its pay structure is well tax optimised. Such employees should go for the old regime as they will benefit from all the deductions and exemptions allowed to them in the old regime,” says Rana. Some of the key exemptions and deductions relate to House Rent Allowance, interest on housing loan in case of self-occupied house property, set-off losses, investments in Section 80C and 80D instruments, and so on. 
 

Apart from tax saving, investments in tax-saver products like Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS) also help build a corpus over the long-term. For those who have purchased a house, the older tax regime would be attractive as it allows large deductions under Section 24 (up to Rs 2 lakh on home loan interest repayment) and under Section 80C (up to Rs 1.5 lakh on principal repaid). 
 

Who then should stick to the older regime? “A taxpayer who has large outflows towards investments, housing loan, education loan, children’s tuition fee, etc may like to continue with the old tax regime,” says Archit Gupta, founder and chief executive officer, ClearTax. 

Next, let us turn to a few cases involving various levels of income and various levels of deductions to see which regime benefits whom. 

Case 1: Zero deduction availed

Someone who is in the income bracket of Rs 5-15 lakh, does not avail of any deductions, and is in need of higher disposable income, will benefit from opting for the new tax regime, as the table below shows: 

Annual income (Rs)	Tax under existing regime (Rs)	Tax under new regime (Rs)	Tax savings under new regime (Rs)
Up to 7,50,000

65,000 39,000 26,000 Up to 10,00,000 1,17,000 78,000 39,000 Up to 12,50,000 1,95,000 1,30,000 65,000 Up to 15,00,000 2,73,000 1,95,000 78,000

Source: ClearTax

Case 2: Standard deduction and Section 80C availed 

Let us look at the case of taxpayers who have salary levels of Rs 12.5 lakh and Rs 15 lakh. They have not taken a home loan and have availed only of the standard deduction of Rs 50,000 and Section 80C deduction. Even in their case, the new tax regime remains more attractive. 

Particulars	Old Regime	New Regime	Old Regime	New Regime
Income (Rs)	12,50,000	12,50,000	15,00,000	15,00,000
Less: Specified deductions	,	,	,	,
80C deduction (Rs)

1,50,000 -- 1,50,000 -- Standard deduction (Rs) 50,000 -- 50,000 -- Profession tax (Rs) 2,500 -- 2,500 -- Taxable income (Rs) 10,47,500 12,50,000 12,97,500 15,00,000 Tax on above (in Rs, including Health & Education cess @4%) 1,31,820 130,000 2,09,820 1,95,000

Source: RSM India

Case 3: Deductions under Section 80C, 80 and 24 availed
 

Next, let us look at the case of taxpayers who have a similar level of income, but in addition to Section 80C deduction also avail of a variety of other deductions, such as under Section 24 (interest on home loan for self-occupied property), Section 80D (medical insurance), etc. In this case, the balance tilts in favour of the old regime.

Particulars	Old Regime	New Regime	Old Regime	New Regime
Income (Rs)	12,50,000	12,50,000	15,00,000	15,00,000
Less: Specified deductions	,	,	,	,
Interest on self-occupied property (Rs)	2,00,000	--	2,00,000	--
80C (Rs)	1,50,000	--	1,50,000	--
80D (Rs)	25,000	--	25,000	--
Standard deduction (Rs)	50,000	--	50,000	--
Profession tax (Rs)	2,500	--	2,500	--
Taxable Income	8,22,500	12,50,000	10,72,500	15,00,000
Tax on above (including cess @4%)

80,080       

1,30,000    1,39,620 1,95,000

Source: RSM India

What should you do? 
 

Experts say that to find the answer to the question whether one should go for the old regime or for the new one, one needs to run the numbers on a case-by-case basis. An employee should calculate his annual income, the deductions and exemptions he is entitled to, and then arrive at whether the old or the new regime is more beneficial. 

Meanwhile, we have provided a table below, which for various levels of income, gives the break-even point of deductions. If for a certain income level, the deductions you can avail (by making the requisite investments) are below the level given in the table, you should go for the new regime. On the other hand, if you can avail of a higher level of deductions, continue with the existing regime to minimise your tax liability. 

Income (Rs)	Breakeven point for specified deductions (Rs)
5,00,000

No tax payable under both the regimes after claiming rebate under section 87A 6,00,000 50,000

7,00,000

1,00,000 8,00,000 1,37,500 9,00,000 1,62,500 10,00000 1,87,500 11,00,000 1,87,500 12,00,000 1,91,670 13,00,000 2,16,665 14,00,000 2,33,330 15,00,000 and above 2,50,000

Source: RSM India 

Finally, there could be a situation wherein you inform your employer now that you have chosen a certain tax regime and later realise that you made the wrong choice. “In that case you will still have the option to switch to the more beneficial regime at the time of filing your tax returns,” says Gupta.