If you are a salaried person and every year think about whether to choose the old tax system or the new one, then this news is useful for you. The government has implemented the new tax system from the year 2020, in which the tax rates are low but the exemptions are not much. At the same time, in the old tax system, you get the full benefit of tax exemption and tax savings. In such a situation, for those taxpayers whose tax planning is already done, the old tax system can still be a profitable deal.
For whom is the old tax system still a profitable deal
The new tax system may seem attractive due to its low rates, but in certain circumstances the old tax system can still prove to be more beneficial. If you already invest to save tax and take advantage of certain exemptions, then sticking to the old system can be a wise decision for you.
If you claim most tax exemptions and savings
If you invest in Employee Provident Fund (EPF), Public Provident Fund (PPF), LIC premium, home loan principal, or Equity Linked Savings Scheme (ELSS) under Section 80C, you get a deduction of up to the ₹ 1.5 lakh in the old tax system regime. Apart from this, allowances like Section 80D (health insurance), Section 24 (b) (home loan interest), and HRA are also included in tax exemption. If you are taking advantage of all these, then moving to the new tax system may increase your tax. In the old system, you get a chance to save tax on your savings and investments, which is not available in the new system.
If you have a home loan or you live in a rented house
Home loan takers got a big benefit in the old tax system. You can get a deduction on interest up to ₹ 2 lakh and claim the principal in 80C. At the same time, people living in a rented house can avail of HRA (House Rent Allowance). All these exemptions are not available in the new tax system. If you have a home loan or you live on rent, then choosing the old system can save you a lot of tax.
When your salary includes allowances and exemptions
Most employed people get allowances like HRA, LTA (Leave Travel Allowance), conveyance allowance, and professional tax. But in the new tax system, there is no exemption on these, which can increase your tax. If your salary includes these allowances, then it is wise to stay with the old system.
When you want freedom and flexibility in tax planning
The old tax system is better for those taxpayers who like to invest with planning. In this, you can also save tax through long-term tools like PPF, ELSS, NPS, and also make a financial plan. While the new tax system is certainly simpler, there is no incentive for tax savings. If you want to secure your financial future as well as save taxes, then the old system is the right option for you.
Do the calculation once
The simplicity and low rates of the new tax system may seem attractive, but if you invest in tax-saving instruments, pay home loans, or have more exempted components in your salary, then the old tax system is more beneficial. Before choosing the right option for yourself, do a complete calculation of your tax liability under both systems. This will help you understand which system will benefit you more.