Income Tax Return Filling is a crucial responsibility for every taxpayer. With the introduction of the new tax regime, taxpayers now have a choice between sticking to the old tax system or opting for the new one. Both tax regimes have their pros and cons, making it essential for taxpayers to understand the differences and choose the option that suits them best. In this comprehensive guide, we will analyze and compare the old and new tax regimes, helping you make an informed decision about your income tax return filing. Whether you are an individual taxpayer or a business entity, this article will provide the necessary insights to navigate the complexities of the tax system.
Understanding the Old Tax Regime
The old tax regime has been the standard system for income tax calculation in India for several years. Under this regime, taxpayers are eligible for various deductions and exemptions, which can significantly reduce their taxable income. These deductions include benefits under Section 80C for investments in specified instruments like Provident Fund (PF), Public Provident Fund (PPF), and National Savings Certificates (NSC). Additionally, deductions under Section 80D for medical insurance premiums, Section 24 for home loan interest payments, and Section 10 for House Rent Allowance (HRA) are available.
However, the old tax regime is associated with higher tax rates. The tax slabs are structured based on income brackets, and as the income increases, the corresponding tax rate also increases. While the old tax regime allows taxpayers to claim various deductions, it may not necessarily result in the lowest tax liability. To determine whether the old tax regime is suitable for you, it is crucial to assess your income, deductions, and exemptions.
Exploring the New Tax Regime
The new tax regime was introduced in the Union Budget 2020-21 as an alternative to the old system. It aims to simplify the income tax structure by offering lower tax rates and eliminating most deductions and exemptions. Under the new regime, taxpayers enjoy reduced tax slabs, which could potentially result in lower tax liabilities.
However, it is essential to note that certain deductions, such as those under Section 80C, Section 80D, Section 24, and Section 10, are not applicable in the new tax regime. Taxpayers must carefully evaluate the impact of these foregone deductions and exemptions before opting for the new system.
Comparative Analysis: Which Regime is Right for You?
Choosing between the old and new tax regimes depends on various factors, including income level, deductions, exemptions, and personal financial goals. Let’s delve into a comparative analysis of both tax regimes to help you make an informed decision.
Increased Tax Rebate Limit
A total tax rebate of up to 7 lakhs has been introduced. Under the previous tax regime, this threshold was set at five lakhs. This implies that people earning up to Rs 7 lakh would not have to pay any tax under the new regime!
Simplified Tax Slabs of both Tax Regime
The tax exemption limit has been raised to 3 lakhs, and the new tax slabs are as follows. Here are the new vs old tax regime slab-
Income Range (in INR) | Old Tax Regime (%) | New Tax Regime (%) |
---|---|---|
Up to 2.5 lakh | 0 | 0 |
2.5 – 5 lakh | 5 | 5 |
5 – 7.5 lakh | 20 | 10 |
7.5 – 10 lakh | 20 | 15 |
10 – 12.5 lakh | 30 | 20 |
12.5 – 15 lakh | 30 | 25 |
Above 15 lakh | 30 | 30 |
Looking at the tax slabs, it is evident that the new tax regime offers lower rates for certain income brackets, particularly for those earning between 5 to 7.5 lakh INR. However, the reduced rates in the new regime come at the cost of foregoing deductions and exemptions.
Impact of Deductions and Exemptions
Under the old tax regime, taxpayers can claim various deductions and exemptions to reduce their taxable income. These deductions include investments in instruments like PF, PPF, NSC, and deductions for medical insurance premiums, home loan interest payments, and HRA. These deductions can significantly lower the tax liability for individuals.
On the other hand, the new tax regime does not allow for most deductions and exemptions, except for employer contribution to a notified pension scheme (Section 80CCD(2)) and deductions for new employment (Section 80JJAA). While the lower tax rates may seem appealing, it is crucial to assess the impact of foregone deductions and exemptions on your overall tax liability.
Old Vs New Regime Example
Suppose an individual has an income of Rs. 8,00,000. The following table shows the tax calculation under the new and old regimes:
Particulars | Tax under Old Regime (In Rs.) | Tax under New Regime (AY 2024-25 onwards) (In Rs.) |
Salary | 8,00,000 | 8,00,000 |
Less: Standard Deduction | (50,000) | (50,000) |
Taxable Income | 7,50,000 | 7,50,000 |
Total Tax | (0%*2,50,000) + (5%*2,50,000) + (20%*2,50,000) | (0%*3,00,000) + (5%*3,00,000) + (10%*1,50,000) |
= 62,500 | = 30,000 | |
Cess @4% | 2,500 | 1,200 |
Total Tax Inclusive Of Cess | 65,000 | 31,200 |
Evaluating Your Tax Liability
To determine which tax regime is more beneficial for you, it is essential to evaluate your tax liability under both systems. Consider your income, deductions, exemptions, and personal financial goals to make an informed decision. Here’s a step-by-step approach to evaluating your tax liability:
- Calculate your taxable income under the old tax regime, considering all applicable deductions and exemptions.
- Calculate your taxable income under the new tax regime, excluding most deductions and exemptions.
- Apply the respective tax rates from the tax slabs provided for each regime to calculate your tax liability.
- Compare the tax liability under both regimes to identify which one results in a lower tax burden.
- Consider your financial goals and the impact of foregone deductions and exemptions on your overall financial plan.
- Make a decision based on the comparative analysis and choose the tax regime that aligns with your financial objectives.
Know More Addition Information About Income Tax Return
Additional Considerations
Apart from the comparative analysis of tax liabilities, there are a few additional factors to consider when choosing between the old and new tax regimes:
- Long-term Financial Planning: Evaluate the impact of deductions and exemptions on long-term financial goals such as retirement planning, education funding, and home loan repayment. If these deductions play a significant role in achieving your financial objectives, the old tax regime may be more suitable.
- Simplicity and Convenience: The new tax regime aims to simplify the income tax structure by eliminating several deductions and exemptions. If you prefer a simpler tax system without the complexities of claiming deductions, the new tax regime may be a better fit.
- Flexibility: It is crucial to assess your ability to adapt to changes in the tax regime. Once you choose a tax regime for a particular financial year, you cannot switch back to the other regime for that year. Consider your future income projections and any potential changes in your financial situation before making a decision.
- Professional Advice: If you are unsure about the impact of deductions, exemptions, and tax rates on your tax liability, consider seeking professional advice from a tax consultant in Dwarka Delhi or financial planner in Dwarka Delhi. They can provide personalized guidance based on your specific circumstances.
Conclusion
Choosing the right tax regime for income tax return filing requires careful consideration of various factors. The old tax regime offers the advantage of deductions and exemptions, which can significantly reduce your taxable income. However, the new tax regime provides lower tax rates for certain income brackets, simplifying the income tax structure.
Evaluate your income, deductions, exemptions, and long-term financial goals to assess which tax regime aligns with your objectives. Consider the impact of foregone deductions and exemptions on your overall financial plan. Seek professional advice if needed to make an informed decision.
Remember, income tax return filing is an essential responsibility, and choosing the right tax regime can have a significant impact on your overall tax liability. Stay updated with the latest tax regulations and consult reliable sources for accurate information.