New Vs Old Tax Regime: Which one is for you?

contactus@beekayassociates.com

 

 

New Vs Old Tax Regime: Which One Should You Choose?

 

A new tax regime has been promulgated by the finance minister. We all know that tax saved is money saved and towards this would love to choose the most suitable option. As the new financial year begins, it is time to choose what will it be? Should One go with ‘Old is gold’ or the ‘New’ that could present better opportunities to save taxes on one’s income… this is unarguably one of the most googled question after COVID 19 in recent times!

 

It is time to choose the most suitable option and at least for the salaried class, it is time to let it be known to their employers so that they cut appropriate taxes on their income.

 

Both the Tax regimes as mentioned in the budget for FY 2020-21 by the Finance minister would be valid choices.  And it is not as if you choose once and you are stuck for lifetime kind of situation, unless you are earning professional income. For those having professional income, the tax regime once chosen cannot be changed.

 

Having said that the question still remains, what should it be. Well there is no “one shoe fit” solution for all and there is an element of some simple calculations involved that should help one make the right choice.  Before going any further, let me talk about the pros and cons of both.

 

The most attractive feature of the old regime is a slew of deductions that make the tax liability lower. There are deductions like Standard Deduction of Rs. 50,000, LTC, HRA, Education & transport allowance, Deduction of employment and professional tax, Interest on education loan, Medical Insurance, Deduction on family pension and a host of others that could be availed by an individual to bring his tax liability down.

 

A very common head is u/s section 80 C that people use to save on tax and which covers a number of instruments to include contribution to PF, PPF, life insurance schemes, specified schemes of mutual funds etc. A lessor known but very important deduction that almost everyone claims would be the rebate on savings bank interest that is available up to Rs.10,000 for an individual and up to Rs. 50,000 for a senior citizen. An Individual can save taxes to the tune of Rs. 1,32,600*(* if they are in the highest tax slab) just by availing the usual and very common deductions like 80 C, medical insurance, NPS and home loan interest. (for illustration purpose only)

 

Of course, the flip side is that most of these tax saving measures have a mandatory lock in that compromises the liquidity and also, given the host of deductions that need to be claimed, make the IT filing process that much more complicated.

 

Two of the main reasons to introduce the new regime are:

1.   To encourage people to spend and not save. This would obviously put more liquidity in the system and boost growth through spending.

 

2.   The second is to encourage people to be ‘atmanirbhar’ and try and make the process of tax filing that much simpler so that most people file their returns conveniently and accurately.

 

One of the biggest disadvantages of the new regime is without doubt the non-availability of claims on deductions.  So, one can’t claim tax rebates on most savings like PF, PPF, Life and medical insurance premiums amongst a host of other deductions that most salaried individuals claim like HRA, LTC etc.  What they can claim is standard deduction of 30% towards maintenance on rented property and also claim deduction on interest out go on a home loan taken for rented property.  This however cannot be set off or carried forward to next year as was available in the old tax regime.

 

Another major disadvantage is that in a country like ours, where most people save only to save taxes, taking away the benefit of tax saving would leave them with lessor motivation to do savings.  This in turn would leave them with no or reduced savings for upcoming financial goals like children education or retirement of self.  So, unless they are disciplined enough, choosing the new tax regime may, save them some taxes (in some cases), but in the longer run would prove disastrous.

 

 

Some generalized features that can help one choose between the OLD and NEW are:

 

1.   If you have savings that are more than 2.5 lakhs per annum, then it would be wiser to opt for the OLD regime.

2.   A salaried individual would be better off with the OLD regime else they will lose some or all of the available deductions.

3.   If you are already paying insurance premiums, have taken a house loan on a self occupied house, contributing to NPS, staying on rent and getting HRA, then these are certainly some of the major reasons to opt for the OLD regime.

4.   If you have linked your savings to a financial goal like for your retirement of children’s education, then either be disciplined or it is wiser to continue doing so and taking benefit under the OLD regime.

5.   If you are a senior citizen who gets interest income, then the OLD regime would help you save more taxes.

6.   If you are a consultant who gets professional income and no salary or pension, then the NEW regime may be a better bet. However, remember if you choose once, then you cannot go back to the old regime.

7.   If you are a disciplined investor and would save no matter what towards your financial goals, and if you are not claiming any other deductions as mentioned above, then also the NEW regime may be better.

 

These are generalized guidelines.  Remember that each individual would have different salary structures and different saving patterns, so there certainly cannot be one size fit all solution.

 

Tax has never been a simple affair for the average Indian.  The new tax regime has introduced three more tax slabs, adding to the complication. Most tax payers are confused as they try to figure out the best and most suitable one.

 

Several website have come out with calculators that help individuals figure this out. However, many tax exemptions and small intricacies are still not clear to the individuals and since most of these calculators are based on inputs fed in , the results may not be as accurate as one that is calculated by your tax advisor.

 

So, what should it be? Convenience and liquidity over a disciplined but more complicated system of taxes?  Obviously, the major point that would swing the decisions would be which regime puts more money in our pockets apart from which suits our unique requirements more!

 

Be a smart Tax payer and save taxes!

 

 

Anupama Bhargava CFP

Director

Beekay Taxation & Investment LLP