What Are Old And New Income Tax Regimes?
Under the old tax regime, a taxpayer can avail deductions/tax exemptions such as house rent allowance (HRA), leave travel allowance (LTA) tax exemptions, Section 80C, 80 D deductions etc., whereas, under the new tax regime the taxpayers will have to forgo around 70 deductions and tax exemptions. However, the new tax regime offers lower tax rates as compared to the old tax regime. Furthermore, under both tax regimes, a taxpayer gets a rebate of up to Rs 12,500 under section 87A of the Income-Tax Act, 1961. This means the individuals who have a net taxable income of up to Rs 5 lakh would not have to pay any income tax regardless of the tax regime chosen by them.
How To Choose Between The Old And New Income Tax Regimes?
The major difference between both tax regimes is the difference in slab rates. The income tax individuals taxpayers pay is based on a slab system in India which is made taking into account the average income of the individuals.
An important difference between both tax regimes is the option to reduce tax liability. Although no deduction is permitted under the tax regime, a taxpayer has myriad options in the old tax regime. Where the new tax regime gives the taxpayers the option to claim zero deduction or exemption options, the old regime provides around 70 deductions as well as exemptions to reduce their taxable income. The deductions under the old tax regime let taxpayers reduce the tax amount by investing, saving, etc.
Old Tax Regime Vs New Income Tax Regime: Which One Is Better?
In order to ascertain which tax regime is better, the taxpayer should compute the income tax liability at the applicable tax rates. For instance, at the old tax slab rates, salaried individuals should calculate their tax liability after availing all the eligible exemptions and deductions from their income. Taxpayers can claim the exemption for HRA, LTA, and standard deduction of Rs 50,000 under the old tax regime. Furthermore, taxpayers can also claim deductions under Section 80C up to Rs 1.5 lakh, National Pension Scheme (NPS) contribution, deduction for interest on housing loans, etc.
For the new tax regime, the taxpayer should compute the income tax liability according to the tax slab rates given under it. Thus, they can compare and choose the tax regime that suits them better. Choosing between the old or new income tax regime depends on a taxpayer and hinges upon his/her income structure, circumstances, and available deductions.
Who Should Go For The Old Tax Regime, And Who Should Opt For The New One?
Deciding between the income tax regimes might hinge upon several factors such as current income level, income structure etc. The taxpayers will have to figure out their tax liability under the old and new tax regimes before taking a decision regarding which one is beneficial.
The income tax department has also brought in an easy-to-use calculator which computes a taxpayer’s tax liability under both tax regimes. Many taxpayers benefit from the old regime when they go for more tax deductions under Section 80C and benefits available in their salary structure, for instance, receiving a part of CTC as reimbursements, claiming HRA etc.
Is It Allowed To Swap Between The Old And New Income Tax Regimes Multiple Times?
Salaried individual taxpayers can make this choice every year. Taxpayers with income under the head house property, salary, other sources, and capital gains can choose to switch between the old and the new regime every year. However, the taxpayers who have income that comes under business or profession are given only one opportunity to return to the old tax regime after they go for the new tax regime.