New vs Old: Which Income Tax Regime Should you opt for in the Coming Year?

Budget 2020 saw Finance Minister Nirmala Sitharaman introducing a new income tax regime. On the one hand, this new system comes with lower slab rates, and on the other, it eliminates certain deductions and claims. The other thing about this new tax regime is that it’s optional. This means that you do not need to compulsorily opt for this system of taxation. You can choose to continue with the old scheme, wherein you can claim all the available deductions and exemptions associated with tax-saving investments.

So, if you’re wondering which system of taxation to opt for, you’re not alone. With the tax filing season drawing in closer, many salaried employees and self-employed professionals are faced with the same doubts. To sort this out further, let’s take a look at these two systems of taxation.

Old vs. new income tax regime

The old tax regime has different slabs of income. It also has different exemption limits for people between 60 and 80 years of age, and for people above 80. Additionally, the old system lets you claim deductions on the tax-saving investments you have. Here’s a look at the tax rates as per the old tax regime.

By contrast, as per the new tax regime, the new tax rates across uniformly across all ages. The income slabs are smaller and are divided more robustly, and there are 7 different income slabs in the new income tax regime. Let’s take a look at the new tax rates.

So, as you can see, the new income tax regime gradually increases the rate of tax from one income slab to another.

Additional Read: Has the Budget Simplified the Income Tax Regime or Complicated it?

Should you opt for the old income tax regime?

The old tax system has been in place for some time now, and you’re probably more familiar with it. However, the answer to whether or not you should choose this system depends primarily on the slab in which your income falls, and on the tax-saving investments you have in your portfolio.

Since this regime makes room for deductions relating to tax-saving investments, it’s advisable to opt for this alternative if your portfolio includes many such investments. This way, you can claim the entire Rs. 1.5 lakhs allowed under section 80C and reduce your income tax rates significantly.

Under the old tax regime, you can also enjoy deductions for NPS investments over and above what section 80C offers. You can claim an additional Rs. 50,000 for NPS investments under section 80CCD(1B). The old system also gives you other benefits like HRA exemption and deductions for home loan interest up to Rs 2 lakhs.

If the amount of tax-saving investments in your portfolio are just slightly short of the maximum deduction allowed, you could invest your savings in tax-saving options. The Moneyfy app from Tata Capital can help you here. By simply downloading our app from the app store and launching it, you can invest in tax-saving mutual funds like ELSS with just a few simple clicks. You can also start and SIP or invest a lump sum amount on Moneyfy.

Additional Read: Is ELSS a Wealth Creation & Tax-Saving Tool?

Should you opt for the new income tax regime?

The new tax rates may be arguably lower in some cases. So, depending on your income level, you could actually be charged a lower rate as per the new scheme. For instance, say your total taxable income is Rs. 7,50,000. As per the old system, your tax rate is 20%. As per the new tax rates, however, it’s only 10%. This tells you that you should opt for the new income tax regime if the rates therein come out to be lower, so your tax burden is minimized.

Also, since the new regime does not allow for any deductions, people with fewer tax-saving investments may benefit more from the new tax rates.

What are some things to keep in mind before choosing any one regime?

Before choosing between the old and new system, it helps to follow some tips and keep some things in mind. Here are some such pointers to help you make the choice.

• Identify the deductions and exemptions available to you.
• Determine your total taxable income before and after deductions and compare the tax liabilities in the old and the new regimes.
• If your liability works out to be the same in both the regimes, you could benefit more from the old system, which allows for exemptions and deductions.
• Also factor in your long-term goals and plan your investments accordingly. Remember that it’s not wise to refrain from investing in tax-saving options just because you’re choosing the new scheme.

Conclusion

Before you make a choice between the two schemes of taxation, weigh your options wisely and make use of online tax calculators to determine your tax liability under each system. If you have a bit of your savings available for investments, you can opt for tax-saving investments to further reduce your tax burden in the old system.

For instance, tax-saving mutual funds can help you reduce tax as well as create wealth in the long run. Moneyfy from Tata Capital enables you to invest in ELSS, which are tax-saving, equity-linked funds. The app also helps you compare various mutual funds and make an informed investment decision.