Comparing Old and New Tax Regimes

Photo by Christian Stahl

The Government of India has announced a new income tax regime under Section 115BAC, with a goal to boost the purchasing power of taxpayers and to simplify the complexity in income tax laws. This new amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021–22 and subsequent assessment years.

The new regime introduction comprises a significant change in our tax laws. The rates have been reduced for the individual taxpayers who forgo certain deductions and exemptions.

As a result, providing significant relief to the individual taxpayers in some scenarios. And, are more likely to have an impact on our pocket.

From F.Y. 2020–21 onwards, you have options to pay tax in respect of the total income at the following rates:

For citizens below 60 years

One More, Seriously?

The tax system in India has been already a complicated mess. Adding one more thing into it isn’t going to simplify anything or solve the real problem. The problem is that nobody needs another tax regime. It is nice to have an option, instead of something that we really need to sort out our work-life.

Duplicating the existing methods without improving on them is not being something that we want or need from our Government. It didn’t solve any problems.

Or could this be the first step towards the simplified future systems of our Government? Let’s wait and see.

What Now?

Living by stereotypes and other gross over-simplifications of a more complex underlying reality only going to hurt every one of us in the long run. So let’s try to learn as much as we can keeping in mind that we’re often going to be wrong.

Also, I would suggest avoiding letting other people do your thinking for you — unless you just like living in misery. You’re better, smarter, and wiser than you think you are.

And, let’s not be afraid while jumping into all this complexity, and our messed up Government processes. Let’s stay excited and relieved while digging more into this. The more we can zoom out and embrace all this complexity, the better chance we have of zooming in on the simple details that matter most.

Let’s Sort Out

In order to save on our tax bills, we need to understand both of these income tax regimes.

Let’s compute the money we will be paying in both of these options on an assumption that the individual has a maximum taxable income of ₹ 15,00,000, without availing any Deductions or Exemptions.

For citizens below 60 years

Clearly, we can see a difference in bills with new rates.

₹2,62,500 - ₹1,87,500 = ₹75,000

₹75,000 is the maximum amount one can save by opting in for the new tax regime (for any value of taxable income).

Why maximum? Because any income that falls above ₹ 15,00,000, is going to be charged with the same rate of 30% in both old and new regimes so there will be no difference in any taxation above this limit.

Yay! Savings!

But with one catch. Our tax liability could be any amount as there’s no cap on the loss amount. Why? Because there are certain deductions and exemptions you have to forgo with the new tax regime.

More than 120 exemptions of different nature are currently provided in the Income Tax Act. Around 70 of them has been removed in the new regime. With the target of gradually removing the remaining ones in upcoming years.
— Ministry of Finance

Smart move, eh?

We will have to cut out the benefit of standard deduction available to salaried individuals, house rent allowance (HRA), deductions under Section 80C, 80D, 24 (B) and so on if you are opt-in for the new tax regime.

So Should You Switch?

The new tax regime is optional.

In fact, you can switch back and forth between the existing income tax regime and the new one. We will have to choose between the old and the new regime at the time of filing returns for the next financial year.

The new regime has its own benefits and drawbacks depending on:
— how much does an individual earns annually
— what type of deductions you can claim

Below are the break-even points I have calculated to help you decide which one you should opt-in for.

Break even points

If you’ve deductions/exemptions close to the values listed above you, it’s better for you to continue with the old regime. You will not benefit anything from the new tax regime.

Conclusion

In a nutshell, the new tax regime only seems to be beneficial to those people who are unable to avail of any exemptions or deductions. The higher the exemptions you are claiming, the less likely you will benefit from the new tax regime.

Comments? Leave a note here or email me at info@planetabhi.com

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