How the tax rates compare: Old vs. new regime?
|Income Level||Old Tax Rate||New Tax Rate|
|Up to Rs2.50 lakhs||Nil||Nil|
|Rs2.50 lakhs to Rs5 lakhs||5%||5%|
|Rs5.00 lakhs to Rs7.50 lakhs||20%||10%|
|Rs7.50 lakhs to Rs10 lakhs||20%||15%|
|Rs10 lakhs to Rs12.5 lakhs||30%||20%|
|Rs12.5 lakhs to Rs15 lakhs||30%||25%|
|Above Rs15 lakhs||30%||30%|
The old regime has just 3 applicable tax rates of 5%, 20% and 30%, whereas the new tax regime has 6 granular rates of tax. Above an income level of Rs15 lakhs, the rates will remain the same under both the regimes. But, the difference is a lot more nuanced. The new regime of tax requires that you forgo most of the exemptions including standard deduction, Section 80C benefits, Section 80D benefits, Section 24 for interest on home loans, HRA exemptions etc. If you are currently availing these exemptions, will it make sense to shift to the new tax regime?
What to do if you are already availing exemptions?
Let us understand this better with the example of two persons (A and B) with annual income of Rs7.25 lakhs and Rs10 lakhs respectively. Assume that currently they are availing the following benefits; (a) Professional Tax – Rs2,500 (b) Standard Deduction – Rs50,000 and (c) Section 80C – Rs150,000. Total deductions would thus work out to Rs202,500. How would their post tax income look like in the told tax regime versus the new tax regime?
|Total Income Rs7.25 Lakhs (A)||DETAILS||Total Income Rs10 lakhs (B)|
|Old Tax Regime||New Tax Regime||Old Tax Regime||New Tax Regime|
|5,22,500||7,25,000||Net Taxable Income||7,97,500||10,00,000|
|17,680||36,400||Total Tax Payable||74,880||78,000|
In the case of A and B, the final tax liability is higher under the new regime despite A paying 10% lower tax rate and B paying 5% lower tax rate. That is largely because, the exemptions are making the old regime more profitable in both the cases.
Does the new tax regime add value at all?
For both the levels of income above, the old regime looks better. Where does the new regime really fit in? The trick lies in how much of exemptions you utilize. In the above case where the income level is Rs10 lakh, let us assume that B saves only Rs50,000 under Section 80C instead of the full limit of Rs150,000. Of course, the exemption of Rs50,000 on standard deduction and Rs2,500 on professional tax will continue.
|DETAILS||Total Income Rs.10 lakhs (B)|
|Old Tax Regime||New Tax Regime|
|Net Taxable Income||8,97,500||10,00,000|
|Total Tax Payable||95,680||78,000|
Clearly, the new tax regime is beginning to add value if you consider lower levels of exemptions. This is also more pragmatic because a person earning Rs10 lakh would find it hard to really utilize the full Rs1.50 lakh limit under Section 80C.
How to take a view: Old regime vs. new regime?
What factors to consider while making the choice? Here are four things to consider.
- Most people have committed outlays under Section 80C. These include CPF, Life Insurance, Tuition Fees, Home loan principal, etc. In such cases, the old regime is better.
- In case you have a home loan (especially low cost home), the old regime makes double sense as your exemption is now Rs3.50 lakhs and not Rs2 lakhs.
- If your annual income is under Rs10 lakh, you can apply the affordability test and see if you really need to take on too many investment commitments. In that case, the new regime would work better.
- Finally, if you are starting off on your career, the new regime is better and you can always to opt for the old regime at a later stage.