5-Step Guide to Help Choose Between Old Vs New Tax Regime

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February 7, 2020 4:13 PM

While under the old tax regime the salaried individuals can continue paying taxes, as they had been doing till now; under the new regime, they will be liable to pay lower taxes, provided they forego their deductions and exemptions.

income tax, which tax regime is better?, income tax calculator 2020, income tax e calculator, how to calculate income tax on salary, how to calculate income tax return, income tax calculator 2020 india, income tax calculator 2020 online, budget 2020, budget 2020 India, Budget 2020 proposals, Budget 2020 for NRIs, income tax return, ITR for NRIIf your taxable income is below 5 lakhs or above 15 lakhs, then tax rates are same in both;

Budget 2020 has given taxpayers an option to continue with the existing tax regime or opt for the new proposed tax regime. Employees today are conflicted as to which regime they should really opt for and why? While under the old tax regime the salaried individuals can continue paying taxes, as they had been doing till now; under the new regime, they will be liable to pay lower taxes, provided they forego their deductions and exemptions.

Difference between the two tax regimes

Deductions/Exemptions

Main exemptions that taxpayers will have to forego if they opt for the new regime are Standard Deduction of Rs. 50,000 to salaried tax payers, House Rent Allowance for individuals staying in rented accommodation, Interest on housing loan for self-occupied property, Leave Travel Allowance twice in block of four years, the most commonly claimed deduction under section 80C for provident fund contribution, life insurance premium, school tuition fee for children, ELSS,PPF etc.

None of the above can be claimed under the new tax regime. A total of 70 exemptions have been done away with in the new tax regime.

Steps to opt for your preferred Tax Regime:

Step 1: Understand what suits you best

If your taxable income is below 5 lakhs or above 15 lakhs, then tax rates are same in both; hence the older regime that allows exemptions is more suited

Step 2: Check the exemptions

Out of all the exemptions that have been removed, check how many are applicable for you and how much money you can save by opting for those. This will help you in the next step.

Step 3: Do the Math

Based on your net taxable income post exemptions/deductions, calculate total income tax under old as well as new regime.

Step 4: Go beyond the numbers

Apart from taxable income, your lifestyle, life stage, short- and long-term priorities along with financial goals are excellent parameters to decide what type of tax regime you should opt for. With inflation, rising consumerism and growing needs, it’s important to start saving early and spend smart. The power of compounding has a great role to play in achieving your financial goals.

Step 5: Remember to plan well

It’s important to note that it is possible to change tax regimes every financial year, as both will exist simultaneously. First – time taxpayers may decide to choose the new tax regime as it’s simple to follow and translates to lower tax liability. However, in the long run, investments have financial benefits and taxpayers will want to go for the old regime as that will be more beneficial.

The current budget announcement has gone the extra mile to provide ample freedom of choice to each salaried individual. It’s best to understand every variable as you go along this checklist before making the switch. Freedom is yours, use it wisely.

By, Prashant Maheshwari – AVP Taxation and Corporate Affairs at Sodexo BRS India

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