 |
|
The Indian government's recent budget introduced a new tax regime, sparking debate among taxpayers about which system is more advantageous. The new regime offers a tax rebate of ₹60,000 on income up to ₹12 lakh (₹12.75 lakh for salaried individuals), simplifying tax calculations by eliminating many deductions. This contrasts sharply with the old regime, which uses three tax slabs (5%, 20%, and 30%) and allows for deductions based on investments in tax-saving schemes, like the Employee Provident Fund (EPF), Public Provident Fund (PPF), and Equity-Linked Savings Schemes (ELSS). The finance ministry aims to promote independent financial decision-making, disentangling tax benefits from investment choices. This allows taxpayers to optimize their finances without the influence of tax incentives.
A detailed analysis reveals that for individuals earning up to ₹12 lakh (₹12.75 lakh for salaried employees), the new tax regime is more beneficial, even when maximizing deductions under the old system. The maximum deductions, including house rent allowance (HRA), can reach significant amounts, but even then, the new regime emerges as a better option in this income bracket. It is important to note, however, that achieving the maximum deduction under the old regime at this income level requires significant investment in tax-saving schemes and maximum HRA utilization. This scenario might not be realistic for everyone.
However, the situation changes drastically at higher income levels. The attractiveness of the new regime diminishes significantly beyond the ₹12 lakh mark. For those earning between ₹13.75 lakh and ₹15.75 lakh, the old regime becomes advantageous provided that significant investments are made in tax-saving schemes, particularly if the taxpayer isn't receiving the maximum HRA. Even with HRA, if a significant investment in tax-saving schemes is made, the old regime may lead to lower tax liability. The threshold for investments needed to make the old regime favorable in this income bracket appears to be around ₹5.25 lakh in tax savings schemes.
The picture shifts again at income levels of ₹20 lakh (₹20.75 lakh for salaried individuals). At this point, the new tax regime becomes significantly more favorable. The tax burden under the new system is considerably lower even after accounting for potential savings in the old regime, especially without considering HRA. This advantage continues to hold true at the ₹24 lakh income level, with the new regime offering substantial tax savings, even with maximum investments in tax saving schemes under the old system.
Ultimately, the optimal tax regime depends heavily on individual income, investment strategies, and HRA benefits. For those earning above ₹15.75 lakh, careful calculation is crucial. While the new regime offers simplicity, the old regime could be more beneficial if the taxpayer consistently invests a significant portion of their income (around ₹5.25 lakh) in tax-saving schemes, especially if HRA benefits exceed ₹3 lakh. For those earning below ₹12 lakh, the simplicity and lower overall tax burden of the new regime offers a compelling advantage. Therefore, individuals need to meticulously analyze their financial situation and assess the potential benefits of each regime before making a decision. Financial advisors can provide invaluable assistance in this process, helping individuals determine which regime best suits their specific circumstances and financial goals.
Source: Old vs new vs newer: When a regime change makes sense