Comparing the tax structures – old versus new
|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 existing regime of taxation has just 3 applicable tax rates of 5%, 20% and 30%. On the other hand, the new tax regime has 6 granular rates of tax. Of course, this classification is only applicable to taxable income up to Rs15 lakhs; not above that. Above an income level of Rs15 lakhs, the rates will remain the same under both the regimes. The bigger issue on which this decision will be taken is the extent of exemptions availed. If the person is availing most of the exemptions, then the old regime of tax suits better. However, if the individual is not availing any of these exemptions, then the new regime is good enough. Here is how a senior citizen above the age of 60 should go about the choice.
Are you benefitting from the exemptions?
For many tax payers, the incidental investments to save tax are a force of habit. Ask yourself this question if you are really benefitting from the exemptions. As a senior citizen, do you require life insurance and if yes, do you need a large cover. A small term cover should be sufficient to give security for your spouse if other responsibilities are already discharged. A lot of investors may still be locked in to PPF contributions. The best you can do is to stop these contributions and let the PPF mature from that level of investment. The cost benefit analysis is a crucial part of your decision as a senior citizen.
Can you shift your tax driven outlays to non-tax driven outlays
Let us assume that you signed on to an ELSS fund SIP some four years back. Each investment made by you is locked in for a period of 3 years. Instead, you can convert your matured ELSS and any future investment into a normal equity fund. You must also check that your ELSS / equity allocation is in sync with your debt/equity mix requirements at your age. Don’t stick to the old regime just because you have ongoing investment commitments. These can be terminated at any point of time. For most senior citizens, unless you are in the much higher income group, the lower rates in the new regime will have more value.
Do you have NPS or medical commitments?
This is a unique case and you must make your choice carefully. For example, if you have an ongoing NPS then you can shift to the new regime because NPS continues to be deductible even in the new tax regime. However, if you are claiming exemptions for medical disability, long term disability, prolonged treatment, specified chronic illness etc, then the tax break under the Income Tax Act special Sections 80DD and 80U can be very meaningful.
What do you really want to save for?
Once you have retired and are a senior citizen, your liabilities are more or less over and most of your assets are paid for. Most commitments must also be discharged and hence the real focus is to sustain your savings and ensure that it pays for your retirement. Your basic question should be whether you really need to take on further commitments to save? Clearly, if you don’t have any goal to save for, then you must focus on making the best of existing investments and shift to the new regime and ensure that you pay lower rates of tax.
For a large number of senior citizens, the new regime would actually make a lot of sense. However, the one thing they need to examine is whether the absence of standard deduction would really make a difference. For senior citizens with annual incomes just above Rs.5 lakhs, the standard deduction in the old regime will push them to zero tax status.