Every year, while filing income tax return or ITR, a common confusion arises among taxpayers – which one should I choose – New Tax Regime or Old Tax Regime? The issue becomes more complicated especially for those whose annual income is between Rs 8 lakh and Rs 15 lakh.
Although the tax rate or slab rate is lower in the new tax regime, most of the exemptions or deductions are not available there. On the other hand, although the tax rate is higher in the old regime, a large amount of tax deduction can be claimed in several areas like 80C, home loan interest and HRA. To understand which regime will benefit you financially based on your income, it is necessary to do some simple calculations.
Which option is best based on income?
For the convenience of taxpayers, a comparative discussion of how much investment or exemption would be profitable under the old regime at different income levels is given below. This can be called the ‘breakeven point’.
If the annual income is Rs 8 lakh
For those with an annual income of Rs 8 lakh, the new tax system is generally more profitable. Under the new rules, income up to Rs 3 lakh is tax-free and rebates are available on income up to Rs 7 lakh. Adding a standard deduction of Rs 75,000 to this, income up to Rs 7.75 lakh is completely tax-free. For income of Rs 8 lakh, the tax amount under the new rules is nominal.
Conclusion: To pay less tax than this under the old system, you will have to show deductions (such as 80C, insurance, PF, etc.) of at least Rs 2.15 lakh more. If you do not have that much investment, then the new tax structure is better for you.
Annual income of Rs 10 lakh
The difference between the two tax systems becomes more clear when the income reaches Rs 10 lakh. In the new rules, the tax rate is divided into 5%, 10% and 15% according to the slab. But in the old rules, 20% tax is paid directly on income between Rs 5 lakh and Rs 10 lakh.
Conclusion: At this income level, the old system will be profitable only if you can claim deductions of more than Rs 3 lakh in total. If your total deductions are less than Rs 3 lakh, then opt for the new tax structure blindly.
Annual income of Rs 12 lakh and Rs 15 lakh
As your income increases, the amount of investment required to save tax under the old system also increases.
Income of Rs 12 lakh: At this level, it will be wise to opt for the old system only if your total tax deductions are more than Rs 4.18 lakh. Otherwise, the lower slab rate of the new system will benefit you more.
Income of Rs 15 lakh: For income of Rs 15 lakh or more, tax is levied at several lower rates before falling under the 30% tax bracket under the new tax system. Under the old system, all income above Rs 10 lakh directly comes under the 30% tax bracket. So, for an income of Rs 15 lakh, you will have to show a huge deduction of around Rs 4.58 lakh to make the old system profitable. This usually requires Rs 1.5 lakh under 80C, along with home loan interest and a large amount of HRA.
Breakeven Chart at a Glance
Here is a list for easy understanding. Only if the deductions are more than the amount given in this list, opt for the old method.
Annual Salary Minimum Deduction Required (Breakeven)
₹ 8 lakhs ~ ₹ 2,12,500
₹ 10 lakhs ~ ₹ 3,00,000
₹ 12 lakhs ~ ₹ 4,18,000
₹ 15 lakhs ~ ₹ 4,58,000
What should you do?
For most ordinary employees who do not have a home loan or do not claim a lot of house rent (HRA), the new tax regime is currently the best option. It does not have the hassle of submitting any certificates and the salary received is higher.
However, if you fulfil the following conditions, the old tax regime can be a goldmine for you:
- If you pay a large amount of house rent and get Han RA exemption.
- If you have a home loan and take a deduction up to Rs 2 lakh on its interest.
- If you invest up to the maximum limit of 80C, 80D and NPS.
- It is wise to use an income tax calculator to calculate your income accurately before making a final decision.