Old vs New Tax Regime: When it’s time to submit income tax returns, a major dilemma for every salaried individual and taxpayer is whether the former tax system is more advantageous or the current one. Experts in taxation suggest that this decision should not be solely based on your tax bracket. It primarily hinges on your investment pattern in the previous tax structure.
A useful approach to making an informed choice is to grasp the concept of “break-even deduction.” This figure indicates the tipping point where your tax liability becomes the same under both regimes. Let’s delve into how this number is determined based on your earnings.
Essentially, the break-even deduction represents a threshold. If your investments fall below this threshold, the new tax system will offer more benefits and tax savings. However, if your investments exceed this threshold, sticking to the old regime would be more advantageous.
Here’s a breakdown of the break-even deduction figures according to different income levels:
For instance, if your yearly income is Rs 12.5 lakh, you need to declare total investments of Rs 4.75 lakh under the old system to equalize the two tax structures. Opt for the new regime if your investments are less than Rs 4.75 lakh (e.g., Rs 3 lakh), and stick with the old system if your investments surpass this amount.
Factors to consider while calculating under the old regime:
Taxpayers are advised by Harshit Agarwal, a partner at HJ Agarwal & Co., to take into account all legitimate investments and exemptions available in the traditional tax scheme before making comparisons. These may include:
– Section 80C: Investments in PPF, EPF, ELSS (equity-linked savings scheme), and life insurance premiums (up to Rs 1.5 lakh).
– Section 80D: Premiums for health insurance covering self and family.
– Section 80CCD(1B): Additional voluntary contributions of Rs 50,000 to NPS.
– Section 24(b): Deduction on home loan interest up to Rs 2 lakh.
– Other exemptions: Donations under Section 80G and interest on education loan under Section 80E.
A useful tip from experts is to remember that company contributions to NPS (Section 80CCD(2)) and standard deductions are applicable in both systems. Hence, these should not be factored into the calculation assuming they are exclusive to the old regime.
Considerations for capital gains:
Harshit Agarwal highlights a crucial technicality: The rebate under Section 87A in the new tax regime does not extend to income taxed at a special rate, such as short-term capital gains (STCG) under Section 111A or long-term capital gains (LTCG) under Section 112A. Therefore, if you have such income, refrain from assuming zero tax in the new system and instead seek accurate calculations with a chartered accountant.
Avoid making decisions based on assumptions:
Chartered Accountant Shreya Gupta Goyal advises taxpayers against selecting a tax regime based on hearsay or others’ experiences. Given the annual alterations in tax slabs, rebates, and deductions in the Union Budget, it’s crucial to reassess your break-even point each year before filing your income tax return, rather than relying on previous estimations. The ideal tax system is the one that leaves you with more money in your wallet, not confusion in your financial calculations.