Old vs New Tax Regime: Which taxpayers should leave the old regime and adopt the new one, know here...
The new year has started for income tax. Along with this, emails have started coming from the office for tax savings and tax declarations. This mail will be regarding choosing an Income Tax Regime. The New Tax Regime was introduced by the Finance Minister in the Union Budget 2020. It is also known as a simplified tax regime. It offers lower tax rates with fewer deductions and exemptions as compared to the Old Tax Regime. Income tax provisions allow a person to choose either of the two regimes. This election can be done every year.
The transition from the old tax regime to the new tax regime mainly depends on key factors like income level, potential tax savings, deductions, and overall tax planning. Lower tax rates under the new regime can reduce tax liabilities for many taxpayers.
Estimate potential tax savings keeping these factors in mind
Speaking to Financial Express, Divya Baweja, partner, of Deloitte India, says, “To evaluate whether to switch to the new tax regime, one should consider the income level, deductions, exemptions, and applicable taxes by comparing the tax liabilities under both the regimes.” It is important to assess the potential tax savings by keeping the rates in mind. Those who will benefit from lower taxes in the new regime may find it beneficial to make the change. For example, resident salaried individuals with gross income up to Rs 7.5 lakh have no tax liabilities under the new tax regime. Additionally, employees earning more than Rs 5 crore may benefit under the new regime due to lower surcharge.”
Important to evaluate deductions and exemptions
It is also important to evaluate the impact of deductions and exemptions available under each regime. The old regime offers a lot of deductions and exemptions, while the new regime offers fewer options. Common exemptions and deductions available to salaried individuals like House Rent Allowance, Leave Travel Allowance, 80C, 80D (Medical Insurance), etc. are not available under the new regime. However, the standard deduction for salaried taxpayers and the deduction for employer's contribution to the National Pension Scheme are available under both regimes.
Permission to go back to the new regime only once in a lifetime
Baweja said that people having income from business and profession can opt for the old regime and it will be applicable for all future years. However, going back to the new regime is allowed only once in a lifetime. Once they return, they become ineligible to opt for the Old Regime for any future year until their business income is exhausted.
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