Tax is the most complicated for some, not so for those who are experienced and well, nothing at all for the CA’s. However you feel about tax, all of us ultimately tend towards saving it; it’s like, the more you save, the more you have for yourself and why don’t you want to have that? (Although the purpose of the government taking taxes from us is to improve the nation.)
So you’ve been on the internet, thinking, “I couldn’t plan on saving tax, but how can I do that somehow now?”. For you to even first think of saving tax, it has become important for you to first pick up on the Tax Regime.
Have you fixated on that yet? Because if you don’t pick that right, then there is no point in thinking of saving tax at all. Why do we even say that? As you read, you’ll understand why that’s otherwise the case.
The Tax Regime Talks …
Before we even get to the point of whether you should go with new or old, “new” was never a topic until recently. It’s the year 2020 when the whole new regime was talked about in the Budget 2020 for the very reason that they wanted to simplify the tax for people.
Since it has been launched, by default, employers have to follow the new regime to cut the tax, unless you want to switch to the old one, which you can if you wish to. But regardless of the purpose for which this was introduced, ultimately to the taxpayers, it’s about “Where do you save more tax?”
Regardless of how complex it is to navigate through the old tax regime to claim deductions for tax benefits if you prefer to do so, you can still rely on it.
Well, considering all the scenarios, both regimes have their advantages that, when used appropriately, can turn beneficial.
What are Tax-Free Bonds?
The Matter of Deduction and Exemption
It’s not that complicated at all between them! After all, they save taxes for you and that’s all you may want to care about.
Deduction, as the name says, wants to subtract something from a whole. Meaning, that you have a total, from which a few things can be reduced, giving rise to a different sum and only that is liable to tax.
The deduction is a concession of the amount from the taxable income.
The exemption is something that doesn’t want to be included in any liability. Which means that a particular amount is not under consideration for tax at all. Unlike a deduction, it is disregarded from taxable income without having to add or subtract.
The exemption is a relaxation of the amount from taxation.
A deduction is allowed if applicable investments and expenses were made, while an exemption is for any income that is applicable to be considered free of tax.
The matter is simple but the point is that there were about 70 deductions and exemptions in the old regime, in which the 80 C deduction was the major benefit to any taxpayer and that is no longer applicable in the new regime except for a few deductions.
That’s where we are heading towards.
Firstly, What’s New in the New Regime?
Of course, when something new is introduced, it must do something different from what the old regime did. Here’s what’s new about the new regime.
1. You can see 6 tax slabs in the new one. Earlier, it was 4 tax slabs. So basically, the tax slabs are now capped at 3 lakhs. Up until 3 lakhs, you attract 0 tax.
2. Tax deductions and exemptions have been removed from the new tax regime. Whereas the old regime had 70 such tax-saving options for you, it is possible to save up to 10.25 lakhs of tax. With the new regime, you can benefit from paying less taxes even if you haven’t invested in any of the tax-deductible investments.
3. A standard deduction of Rs 50,000 is still applicable in the new regime, like in the old one.
4. In the new regime, the tax rebate is applicable for income up to Rs 7.5 lakh, wherein you paid no tax up until now.
If you think about it, how does it even work? Here’s how you can look into it:
| Particulars | Income / Deductions |
|---|---|
| Total Income | Rs 7.5 Lakhs |
| Standard Deduction | Rs 50,000 |
| Total Taxable Income | Rs 7 Lakhs |
Tax is applicable as per the tax slab in the new regime
| Tax Slab | Tax |
|---|---|
| 0 to 3 lakhs | Rs 0 |
| 3 to 6 lakhs | Rs 15,000 |
| 6 to 9 lakhs | Rs 10,000 |
| 9 to 12 lakhs | NA |
| 12 to 15 lakhs | NA |
| 15 lakhs and above | NA |
| Tax payable | Rs. 25,000 |
| Under section 87A, you get a rebate | Rs 25,000 |
| Total Tax | Rs 0 |
So, that way, you are still saved from paying any taxes up to Rs 7.5 lakhs under the new regime.
We’re done with what’s new! Let’s get to know when it’ll be helpful and when it will not.
What is the Difference Between Tax-Free and Tax-Saving Bonds?
The Inference of the New Regime
Let’s not get into what the old tax regime is all about, as you’re already aware of it and have been filing so far. The focus is only on how the new regime is helpful and when it is not so that you can hop to the old regime.
For us to go there, you must know what’s still doable under the new regime.
1. As mentioned, the standard deduction of Rs. 50,000 still exists here.
2. Irrespective of the income level, if your family receives a pension, either ⅓ of the pension amount received or Rs 15,000, which is lower, is allowed for tax deductions in the new regime.
3. As per the new tax regime, the tax deduction is only applicable for the let-out property and not for the self-occupied property. A standard deduction of 30% of the rental income derived from the property being let out is applicable per year and you can also avail of the interest paid on the home loan for the let property without any upper limit on it. Wherein any losses incurred cannot be set off against other income or carried over subsequent years.
4. If your employer contributes to the NPS Tier 1 account, up to 10% of your basic salary and the dearness allowance combined are allowed for a tax deduction.
5. If you have contributed to the Agniveer Corpus Fund, you can avail of tax deductions for this contribution and also tax exemptions on the income received from this contribution.
6. Tax deductions are applicable on the prerequisite for official purposes; gift any received for Rs 50,000 deductions; under Section 10(10c), deductions on voluntary contribution towards retirement; under u/s 10(10), exemption on gratuity amount; exemption on leave encashment under u/s 10 (10AA) of up to Rs 25 lakhs; conveyance and daily allowances; and lastly, deductions on travel allowances for the disabled person.
7. Surcharge rates for HNIs earning over Rs 5 crore are reduced to 25% from 37%.
8. The new regime is by default applicable to everyone and if you wish to switch to the other regime, your income tax return has to be submitted along with Form 10IEA to do so. It doesn’t mean you have to stick to whatever you choose; every year you get to choose the regime that suits your tax-saving needs.
Now that you are aware of all that can be availed of as deductions and exemptions under the new tax regime, let’s look at its benefits for scenarios.
The Scenario that Needs Your Attention
Let’s think of an individual who has investments and is eligible for deductions and exemptions in the old regime and an individual who doesn’t have investments in the new and old regimes for greater comprehension.
For an ideal situation, let’s imagine Ankita earns Rs 15,00,000 and see what seems viable to choose.
| Particulars | Old Regime with Investments | Old Regime without Investments | New Regime |
|---|---|---|---|
| Annual Income | 15,00,000 | 15,00,000 | 15,00,000 |
| Standard Deduction | 50,000 | 50,000 | 50,000 |
| Section 80 C | 1,50,000 | - | - |
| Section 80 CCD, NPS | 50,000 | - | - |
| Health Insurance for Self | 25,000 | - | - |
| Income After Deductions | 12,25,000 | 14,50,000 | 14,50,000 |
| Tax Payable | 1,80,000 | 2,47,500 | 1,40,000 |
The inference from the example is that the new tax regime is beneficial over the old regime, even though a tax deduction of Rs 2,75,000 has been claimed in this scenario and need not always be. On the other hand, it is clear that even if you don’t have any investments to claim deductions, you can opt for a new regime instead of the old regime for that matter.
Are Capital Gain Bonds Helpful in Saving Tax?
How Do You Assess Which Regime is Ideal for You?
It doesn’t mean that your deductions were of no use in the old regime. It is if you know these things:
1. For you to make any benefit from deductions, it must at least be above Rs 3,75,000; that’s when the old regime is beneficial regardless of the income level.
2. Not everyone can commit to making more investments to avail deductions and save more. Suppose the deduction that you can claim is equal to or less than Rs 1,50,000. The new tax regime is more beneficial in this case due to its lower slab rates.
3. There are various deductions and exemptions available but that doesn’t mean everybody wants to be invested in them. Sometimes, the investment available under tax schemes may not be suitable for financial goals; maybe you don’t have any house let-outs on rent and have not taken a loan; maybe you don’t have to take an educational loan. Although with basic deductions and exemptions, if you have a deduction between Rs 1.5 lakhs and Rs 3.75 lakhs, the decision to choose a regime will depend on the income level.
For instance, in the above example of Anita earning Rs 15,00,000 and having a deduction of Rs 2,75,000 to claim, the new tax regime was effective. Now, with the same amount of tax deduction, if we change the income level from Rs 15,00,000 to Rs 8,00,000 in the old tax regime, the total tax payable would amount to Rs 17,500 when compared to Rs 30,000 in the new regime.
Therefore, which tax regime to pick will depend on factors like income level, total deduction, and provisions available in the regimes. To make it more convenient, you can consider the above 3 points to make a quick decision.
The Wrap
Before you go ahead and make any investment to save tax, be mindful about which regime to pick, as choosing one appropriately can help you save the biggest tax, which is more like the first step to sail across, and then comes the investment to save tax.
If you’ve been hooked on making tax-saving investments, it directly implies you are leaning on the old regime. Read here to find tax-saving investment options or ways you can save tax.
