It's that time of the year again! With the new financial year already started, it's important to make the right decision about which tax regime to choose for the year: the old or the new one? Introduced in the Budget of 2020, the new income tax regime for individual taxpayers has been an option for the past three years.
So, what should you choose this financial year? Let's compare the old with the new tax regime to determine which one best suits your needs.
Old Tax Regime
The old tax regime was the tax regime that was in place before the introduction of the new tax regime in 2020. Under the old tax regime, individuals were taxed on their income as per the slabs prescribed by the Income Tax Act, 1961. The tax rate for individuals with income up to ₹2.5 lakhs was nil, and the tax rate increased in progressive slabs thereafter, up to a maximum of 30%.
In addition, individuals could avail of various deductions and exemptions, such as Section 80C, 80D, and so on, for reducing their taxable income.
New Tax Regime
The new tax regime was introduced in 2020 and is aimed at providing tax benefits to individuals who are willing to forego certain exemptions and deductions. Under the new tax regime, individuals can choose to pay tax at reduced rates, but they have to forego certain exemptions and deductions.
The new tax rates range from 5 percent to 25 percent, depending on the taxpayer’s income. Individuals who choose to opt for the new tax regime have to forego exemptions and deductions under Sections 80C, 80D, and so on.
In addition, they cannot avail of the tax benefits of the house rent allowance or the transport allowance. The new tax regime also provides tax benefits to individuals earning income from share trading and other capital gains. The new tax regime is optional, and individuals can choose to stick to the old tax regime if they wish to avail of exemptions and deductions.
How to select between old vs new?
The decision of selecting between the old or new tax regime should depend on the taxpayer’s individual needs and situation. Taxpayers need to analyse their tax savings and decide which one suits them best. Factors like age, total income, existing investments, etc. should be considered before making the choice. The old tax regime is recommended for taxpayers who have a lot of deductions and tax exemptions available to them.
This is because the old regime allows for more deductions and exemptions. The new regime is recommended for taxpayers who have a higher income, who do not have a lot of deductions available to them, and who want to take advantage of the lower tax rates. Ultimately, the choice depends on the individual's financial situation.
Comparison between old and new
Prashant Gupta is the Founder and CEO of Caerus3 Advisors and Think-Tank
Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.