Two tax regimes will now exist simultaneously after the Budget 2021 gave taxpayers a choice. There is the old one, which comes with higher tax rates (at several levels of income) but also offers a host of exemptions and deductions. And there is the new regime introduced by the finance minister, where the rates will be lower for many people, but taxpayers will not be able to avail of any deductions or exemptions.
Experts say the tax regime has now become very taxpayer-specific. Each taxpayer will have to study his/her specific situation at the start of the financial year and then decide whether to opt for the new or the old regime.
For many, it may be beneficial to stick to the old regime. “Our analysis shows that people who were maximising all the tax benefits that are on offer will benefit by staying in the old regime. Such people should not opt for the new regime,” says Archit Gupta, founder and chief executive officer, ClearTax.
A host of exemptions and deductions are available to taxpayers. Salaried employees can avail of house rent allowance (HRA) and leave travel allowance (LTA). Those who have taken a home loan can avail of a deduction of up to Rs 2 lakh on the interest portion of their EMI, and also on the principal portion (under Section 80C).
A deduction of up to Rs 1.5 lakh is available under Section 80C. The deduction on health insurance premium paid every year available under Section 80D can rise as high as Rs 75,000 — up to Rs 25,000 on the premium you pay for your nuclear family, and up to Rs 50,000 on your parents if they are senior citizens.
Another deduction of up to Rs 50,000 is available on the National Pension System (NPS) under Section 80CCD (1B). Several more such benefits are available.
One factor that will complicate calculations further regarding which regime to opt for is the absence of ceiling on some deductions. “The deduction on education loan under Section 80E is one where there is no upper limit,” says Gupta.
The taxpayer can claim deduction on any amount of interest income that he/she repays in a financial year. For those who have taken a big education loan, say, to fund a child’s foreign education, it may make sense to stick to the old regime.
While the new tax regime is simpler, the decision whether to opt for it is not. “Check which exemptions and deductions you are eligible for. Then do the calculations on whether your tax liability will be lower in the new regime or the old one,” says Naveen Wadhwa, DGM, Taxmann.com.
He offers a few ballpark figures. “If your income is less than Rs 8.5 lakh and you only claim Section 80C deduction, then don’t go for the new regime. On the other hand, if your income is more than Rs 8.5 lakh, and you have only been claiming Section 80C deduction, it may make sense to opt for the new regime,” he says.