New tax regime vs old tax regime: Should you switch?

Individual taxpayers now have the option to continue with the existing tax structure or shift to the new slabs in FY 2020-21.

New tax regime vs old tax regime: Should you switch?

Finance Minister Nirmala Sitharaman announced a new regime for personal taxation while presenting the Union Budget. Minor changes have been effected in the tax brackets, and individual tax payers now have the option to continue with the existing tax structure or shift to the new slabs for FY 2020-21.

With the new tax regimen, the central government has further sub-categorised income slabs, primarily for those declaring incomes between Rs 5 lakh and Rs 15 lakh. Both tax slabs will continue to coexist; here’s a comparison of what the options look like on paper:

New tax regime vs old tax regime: Should you switch?

Related: Key highlights of Budget 2020

Should you switch to new tax regime or not?

While there seems to be a clear discount on the tax rate for those declaring incomes between Rs 5 lakh and Rs 15 lakh, the benefit or option of switching to the new tax regime with revised lower rates is dependent on the taxpayer giving up certain deductions and exemptions.

These include:

  • Professional tax
  • House rent allowance
  • Leave travel allowance, conveyance, and daily work-related expenses
  • Children’s education allowance
  • Standard deduction
  • Interest on housing loan (Section 24)
  • Special allowances (Section 10[14])
  • Chapter VI-A deductions (Section 80C, 80D, 80E, etc.)

What does it mean for taxpayers?

Nothing has changed for those declaring an income up to Rs 2.5 lakh, as their tax liability continues to be zero. Those who earn between Rs 2.5 lakh and Rs 10 lakh and do not have any active tax-saving investments, or do not pay for health insurance, or do not have home loan obligations, can switch over to the new tax structure. In this case, their entire income in excess of Rs 2.5 lakh will be taxable as per the slabs mentioned above.

However, it would be prudent to take advantage of the various deductions and exemptions available. One can avail of deductions up to Rs 1.5 lakh for investments under Section 80C – tax-saving deposits, ELSS schemes, life insurance, etc. Additionally, another Rs 55,000 by way of health insurance coverage for self, spouse, and dependent parents under Section 80D, up to Rs 2 lakh as interest on home loan under Section 24, and Rs 50,000 as standard deduction if employed in the formal sector can be availed. There are many other deductions too, under various heads.

For those who are in the highest tax bracket (30%), the savings for fully utilising deductions under Section 80C can amount to Rs 45,000, another Rs 16,500 under Section 80D, Rs 60,000 under Section 24, and at a similar percentage under other deductible categories. If you wish to understand taxation on health insurance in detail read this

Related: Budget 2020: What’s in it for taxpayers? 

Taking a call

For many working professionals, it augurs well to take advantage of the various deductions and exemptions that can significantly reduce their taxable income. However, that call must be taken before the new financial year begins in April 2020 and one would have to file a proposed investment declaration with their employer.

Those who are newly employed, earn between Rs 5 to Rs 8 lakh and do not have any deductible investments or liabilities can adopt the simplified new tax regime. However, you may want to consider the prospects of putting a long-term financial plan in motion with active tax saving investments.

Those in the tax bracket of Rs 15 lakh to Rs 20 lakh are better off sticking to the old regime if their total savings after various deductions exceeds Rs 3 lakh. 

Tax payers in higher brackets - above Rs 30 lakh do not particularly benefit from the introduction of the new tax structure. Similarly, the tax slabs and surcharge for those earning Rs 50 lakh and above remains unchanged. Tax payers who declare income above the Rs 30 lakh threshold may wish to stick with the old tax structure if they have a well-planned financial system in place. Check this infographic to understand income tax slab changes made in Budget 2020.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.




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