Should I switch to a new tax system? Income tax calculator and more!
When choosing between the old income tax regime and the new budgeted tax regime, it can become a bit difficult to choose between the two, given the various exemptions and deductions. In addition, the lower tax rates in the new tax system and its ideation should translate into lower taxes. But is this really the case for everyone?
Not really! The reason is that if you follow the new regime, you will have to forgo most of the tax breaks, including key deductions such as:
- Section 80C (expenses, investments and premium for life insurance up to â¹ 1.5 lakh)
- Section 80D (health insurance premiums up to 25,000 for those under 60 and 50,000 for the elderly)
- Section 24 (interest on a home loan up to â¹ 2 lakh)
- Section 80CCD (national supplementary pension scheme up to 50,000)
- Section 80E (student loan interest)
- Section 16 (standard deduction from salary income of 50,000)
In addition to this, the user will also need to consider the benefits of most of the exemptions under section 10, such as housing allowance and travel concession. When switching between the two, you will need to take into account the impact of these tax breaks on the final tax payable.
So, should we move from the old to the new tax system?
To help you choose between the new income tax regime and the old one, you need to read the context below to understand with an example:
First of all, you need to know the break-even point of exemptions and deductions, where the tax payable would be the same under the old regime and the new income tax regime.
To do this, make a list and calculate the deductions and exemptions you plan to use. In case the total exceeds the break-even point, it is recommended to stick to the old regime. On the other hand, if the total is below the breakeven point, you may consider switching to the new tax system.
Here is an example to help you understand the exemptions and deductions in both scenarios:
Rita is under 60 and has an annual gross income of â¹ 15 lakh. Here, if the exemptions and deductions it claims total 2.5 lakh per year, then the taxable income of the old regime becomes 12.5 lakh with a tax payable of 1.95 lakh.
However, with respect to the new tax regime (in the absence of these benefits of deductions and exemptions), his taxable income becomes â¹ 15 lakh. Nevertheless, all thanks to the lower tax rates, the tax payable remains at â¹ 1.95 lakh.
There is no break-even point for the tax benefits if Rita decides to go with the new regime or the old one.
However, if Rita’s tax breaks exceed 3 lakh, the taxable income under the old regime will drop to 12 lakh with tax payable at 1,79,400. While under the new regime the liability would be â¹ 1.95 lakh. In this case, it is better to continue with the old regime.
If the tax payable is to fall below 2 lakh, the taxable income under the old regime becomes â¹ 13 lakh with a tax of 2 10 600, i.e. higher than the tax payable of â¹ 1.95 lakh as of the new scheme. Here, switching from the existing tax system to the new one would be beneficial for Rita.
Use an income tax calculator to understand the change
An income tax calculator is another way to determine the change and whether it is beneficial. It not only helps calculate tax returns, but also helps you assess the impact of both tax structures on your income.
Flexibility between the new and the old tax system
It is perfectly acceptable to stick with the old regime when filing and switch to the new income tax regime in the years to come, only if it is beneficial. Plus, if you don’t have any business income, it’s easier to choose between the two each year.
Having said that, if you do and switched to the new diet, you would be expected to continue with it in the future as well.
To conclude: the new tax system
The new income tax regime is available to individuals and HUFs, although optional, it is payable at lower income tax rates of up to 15 lakhs compared to the old regime.
If and when you opt for the new tax regime, you will have to forgo multiple tax exemptions and deductions. Under the new tax regime, employees will no longer be able to benefit from advantages such as:
- Standard deduction
- Rent allowance (HRA)
- Travel Leave Assistance (LTA)
Employees and self-employed:
- Under section 80 C (various items such as EPF, LIP, tuition fees, PPF, NSC, ELSS, mortgage repayment, etc.)
- 80D (for health insurance premiums)
- 80 CCD (1)
- 80 CCD (1B) for NPS
- Cannot claim a lump sum deduction from the pension in respect of their previous employment
- Elderly 50,000 deduction for post office and bank interest is also not available
FAQ: do I have to switch to a new tax system? Income tax calculator and more!
1) Is it better to switch to a new tax system?
If you are a taxpayer with below break-even exemptions and deductions then you should go for the new tax regime as they offer lower tax rates.
2) Can I choose between the new and the old tax regime every year?
Only a salaried taxpayer can register and unsubscribe each year from the new and the old income tax regime.
3) When should I opt for a new tax regime?
If you have business income, you must submit the form before the deposit due date. As for employees, the form can be submitted before / at the time of filing the RTI.