Choosing Between the New and Old Income Tax Regimes Post-2020 Union Budget
The 2020 Union Budget introduced a significant change in the taxation landscape for Indian taxpayers. One of the pivotal decisions that taxpayers face is whether to adopt the new tax regime or continue with the old regime with exemptions. This decision is crucial and can have a direct impact on the amount of tax one needs to pay. In this article, we will explore the pros and cons of each regime and help you decide which one is better for you.
The New Income Tax Regime vs. The Old Regime
Currently, we are in a phase where the old regime is still in existence. However, it is expected that the old regime with exemptions will eventually fade away as time progresses. For individuals who do not earn an income and, hence, do not pay taxes, the choice is straightforward as the old regime will not apply until they earn. But for those who save and invest, the old regime with exemptions offers more benefits, as it allows them to claim exemptions. Conversely, those who spend all their income may find the new tax regime more advantageous, as it can result in paying less tax.
Understanding the Impact of the 2020 Union Budget
The Honorable Finance Minister (FM) has announced that the majority of taxpayers will benefit from the new regime. This new regime is expected to lead to simplification and greater tax compliance among the 1.5 crore taxpayers in India. The new tax rates offer a stark contrast to the old regime and are designed to bring more transparency and equity in the tax system.
Deciding Between the Two Regimes
When deciding between the new and old regimes, it's essential to understand the impact on your tax liabilities. The FM has provided two options:
Stick with the old regime if you prefer no changes. Adopt the new tax rates, which require giving up all exemptions and deductions.Let's break down each scenario to help you make an informed decision:
Scenario 1: Your Total Income is Exactly the Same in Both Regimes
In this scenario, you are comparing apples to apples. Without any deductions or exemptions, the new regime will always offer tax savings. For example, at a total income of Rs. 7.5L, you will save Rs. 26,000, and at Rs. 10L, you will save Rs. 39,000 by opting for the new regime. At higher income levels (Rs. 15L or more), the savings can be substantial, ranging from Rs. 78,000 to Rs. 114,000.
Scenario 2: Claiming Standard Deduction and Exempting 80C Limit
Here, you claim the standard deduction of Rs. 50,000 and exhaust the 80C limit of Rs. 1.5L. If your total income is Rs. 7.5L or Rs. 10L, you may end up paying more tax in the new regime. This is because the exemptions and deductions you claim under the old regime offset a significant portion of your income, leading to lower tax liabilities. However, as your income increases, the benefits of the new regime become more pronounced. At Rs. 12.5L and Rs. 15L, even after claiming the standard deduction and exhausting 80C, the new regime will be more beneficial.
Scenario 3: The Break-Even Point
The break-even point is a crucial concept. It refers to the necessary reduction in taxable income needed to ensure that your taxes remain the same in the new regime as in the old regime. This point helps you understand the extent to which you need to reduce your taxable income to benefit from the old regime. For instance, to benefit from the old regime, you need to reduce your taxable income by Rs. 75,000 or more for a total income of Rs. 7.5L, or by at least Rs. 137,500 for a total income of Rs. 10L. These reductions can be achieved through a mix of HRA, 80C, LTA, etc.
Conclusion
The decision to choose between the new and old income tax regimes is highly personalized and depends on individual circumstances. The new regime offers lower tax rates, which can lead to significant savings, especially for high-income earners. However, the old regime with exemptions can be beneficial for those who save and invest. It is advisable to conduct a thorough analysis of your own financial situation and consult a tax expert to make the most suitable decision.