Understanding the New Tax Regime vs. Old Tax Regime
which one works best for you?
Good morning, and welcome to Tuesday! We’re building momentum today. Let’s keep our focus sharp and make steady progress toward our goals. Here’s to another productive day 🥂
But before we start, here’s a dose of positivity for you:
‘Success is the sum of small efforts, repeated day in and day out’
Now, let’s get started…
About the tax regimes
Tax season is here, and with it comes the ever-looming question - should I stick to the old tax regime or switch to the new one? While the answer isn't always straightforward, understanding the differences between the two tax regimes and how they apply to your income can help you make a decision that works best for your financial situation.
In this edition, we’ll break down both tax regimes and guide you on which one suits your needs.
The Old tax regime
The Old Tax Regime follows a more traditional approach where you can avail of a variety of deductions, exemptions, and rebates to reduce your taxable income. If you’re someone who enjoys tax-saving instruments like insurance premiums, home loan interest, and contributions to provident funds, this regime may seem like a familiar route.
Key features of the old tax regime:
Tax slabs: The tax rates are progressive, meaning that the higher your income, the more you pay. Here are the current tax slabs under the old regime:
Up to ₹2.5 Lakh: Nil
₹2.5 Lakh to ₹5 Lakh: 5%
₹5 Lakh to ₹10 Lakh: 20%
Above ₹10 Lakh: 30%
Deductions & exemptions: Under this regime, you can claim various deductions and exemptions such as:
Section 80C: Up to ₹1.5 Lakh for investments in PPF, ELSS, NSC, etc.
Section 24(b): Deduction of up to ₹2 Lakh on home loan interest.
HRA: House Rent Allowance exemption.
Standard Deduction: ₹50,000 for salaried and pensioned individuals.
These benefits can significantly lower your taxable income and the overall tax burden.
Additional tax benefits:
Tax-free income up to ₹2.5 Lakh: No tax is charged for incomes up to ₹2.5 Lakh.
80D (Health Insurance): Deduction for health insurance premiums.
For those with significant deductions, the old regime might allow them to reduce their taxes considerably.
The New tax regime
Introduced in the 2020 Budget, the New Tax Regime offers a simplified tax structure with lower tax rates but without the option to claim deductions or exemptions. This regime is designed for individuals who prefer a straightforward and less paperwork-intensive way of paying taxes.
Key features of the new tax regime:
Tax Slabs: The tax rates are lower, but the major change is that you cannot claim any exemptions or deductions under this regime:
Up to ₹2.5 Lakh: Nil
₹2.5 Lakh to ₹5 Lakh: 5%
₹5 Lakh to ₹7.5 Lakh: 10%
₹7.5 Lakh to ₹10 Lakh: 15%
₹10 Lakh to ₹12.5 Lakh: 20%
₹12.5 Lakh to ₹15 Lakh: 25%
Above ₹15 Lakh: 30%
The tax slabs are more granular and progressive than the old regime, which may result in lower taxes for those with middle-income brackets.
No Deductions/exemptions: You cannot claim any of the following under this regime:
Section 80C (investments in PPF, insurance, etc.)
HRA (House Rent Allowance)
Section 24(b) (home loan interest)
Standard deduction
Simplification: While you lose out on deductions, the new regime simplifies your tax filing by eliminating the need to keep track of various exemptions. It's ideal for those who don’t have major deductions to claim and prefer a cleaner process.
Which one is right for you?
Now that we've broken down the key differences between the two tax regimes, let’s help you decide which one is best suited to your situation.
Choose the old tax regime if:
You have significant investments in tax-saving instruments like PPF, EPF, or insurance policies.
You own a home and pay interest on your home loan.
You qualify for exemptions like HRA (House Rent Allowance).
You’re eligible for deductions under Section 80D for health insurance or Section 80E for education loans.
In this case, the deductions you claim may offset the benefits of the lower tax slabs in the new regime. If your deductions are substantial, the old regime may lead to greater tax savings.
Choose the new tax regime if:
You don't have many exemptions or deductions to claim.
You prefer a simpler, hassle-free tax filing process without the need for receipts or investment proof.
You have a higher income and want to take advantage of the lower tax slabs, especially if your deductions don't provide significant savings.
This regime works better for individuals who don’t benefit much from exemptions or have a straightforward income stream without many expenses or investments.
A Quick Tip for Decision-Making:
To decide, do a quick comparison of your tax liabilities under both regimes. Calculate the total tax you’d owe in each regime and compare. If your deductions in the old regime result in substantial savings, stick with it. Otherwise, the new regime could save you time and money with its lower rates.
So, that’s it for today.
See ya 👋
