Old tax regime versus new: Which one works better for you?

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With the implementation of a new tax regime, uncertainty follows as to which one is best for you. As a taxpayer, you may find it challenging to determine which of the two regimes, i.e., old regime or new regime, is most advantageous and applicable to your income.

Another issue arises: what is your source of income? Are you a paid employee, own your firm, an entrepreneur, or a professional? 

The government introduced a new tax framework in Budget 2020, providing significant assistance to taxpayers and streamlining the income tax law. Another objective is to free taxpayers from their reliance on tax experts and to file their taxes independently.

What do you get under the new tax regime?

In two ways, the new tax structure is distinct from the previous one. First, the new regime has increased the number of tax slabs, backed by a reduction in rates for individuals earning less than Rs 15 lakh.  Second, new regime eliminates all of the exemptions and deductions available to taxpayers under the current framework.

Take a look at the below comparison table between the old and new tax slabs.

As you can see, the new system would tax income between Rs 5 lakh and Rs 7.5 lakh at 10%, and income between Rs 7.5 lakh and Rs 10 lakh at 15%. This was a 20% flat rate across the existing regime’s entire range. In the previous regime, Rs 10 lakh+ slab, which charged 30%, has been divided into three sections, with 20% applied to amounts between Rs 10 and 12.5 lakh, 25% applied to amounts between Rs 12.5 and 15 lakh, and 30% applied to amounts over Rs 15 lakh.

Old tax regime with high rates but options to reduce the tax

 To put it mildly, the current tax structure is complicated. While tax rates are high, there are numerous strategies for lowering your tax liability.

 The government has provided Indian taxpayers with over 70 exclusions and deduction options over the years through amendments to the Income Tax Act, allowing them to reduce their taxable income and thereby pay less tax.

While some exemptions, such as the House Rent Allowance (HRA) and Leave Travel Allowance (LTA), are included in your income, deductions allow you to reduce your tax liability by investing, saving, or spending on specific goods. 

The largest deduction is Section 80C, which allows you to reduce your taxable income by Rs 1.5 lakh. Apart from this, various more sections will enable you to deduct expenses ranging from interest on loans (home and education) to health insurance premiums.

 The combination of exemptions and deductions can result in a significant reduction in your taxable income. However, it also implies that you must maximise your salary and savings and investments each year to limit your taxable income to a minimum.