Are you confused about the old tax scheme & the new tax scheme? Then this blog answers your question. We will look into the new tax scheme in detail, benefits & comparison with the old scheme.
So let’s start.
An Intro to New Scheme
The intention & rationale behind new tax regime is to remove complications of exemptions & deductions and the income earned will straight away get taxed at fixed rates without need for tax planning.
However, make sure you don’t fall in that pit because you may need to forgo your right of claiming many exemptions & deductions. Let’s discuss in detail.
Old Scheme – High rates of taxes but with lot of options to bring down taxes
The government has given 120 exemptions & deductions to bring your taxes down.
In fact, particularly for salaried individuals the most utilized exemptions & deductions are as below.
|
Exemptions |
Deductions |
|
House Rent Allowance (HRA) |
Standard deduction – Flat Rs. 50,000 |
|
Leave Travel Allowance (LTA) |
Provident Fund |
|
Mobile & internet reimbursement |
Tuition fees |
|
Free food coupons |
Life insurance premium |
|
Uniform allowance |
Health insurance premium |
|
Leave encashment |
Medical expenses |
|
Housing loan repayment |
|
|
Savings account interest |
|
|
Professional tax deduction |
|
|
Equity linked saving scheme (ELSS) |
Under the old scheme, the exemptions & deductions can bring down your taxable income by lakhs of rupees. It means you may have to optimize your income, savings & investments in such a way that your taxes put down to the minimum which is possible with a progressive tax planning.
New Scheme – More slabs with lower rate of tax but no way to bring your taxes down
The new scheme is different from old scheme in two different ways.
- Increased income slabs with reduced tax rates especially in the 15 lakh income range
- The exemptions & deductions used all these days would not be available to claim in the new scheme (Almost 70 exemptions removed under new scheme)
Let’s compare the income tax slab rates under both the schemes for an individual whose age is below 60 years:
|
Old Tax Rate |
Income Slab |
New Tax Rate |
|
0% |
Up-to 2,50,000 |
0% |
|
5% |
2,50000 to 5,00,000 |
5% |
|
20% |
5,000,000 to 7,50,000 |
10% |
|
7,50,000 to 10,00,000 |
15% |
|
|
30% |
10,00,000 to 12,50,000 |
20% |
|
12,50,000 to 15,00,000 |
25% |
|
|
15,00,000 & Above |
30% |
Still you can claim few exemptions such as
- Agricultural Income
- Standard deduction @ 30% on rental income
- Leave encashment on retirement
- Retrenchment compensation
- Voluntary retirement scheme receipts upto Rs. 5,00,000
- Other death & retirement benefits such as gratuity, pension, etc
These exemptions available under new scheme will benefit you only at the time of retirement not while rendering service as an employee.
Which one should I choose?
In fact the answer to this question is not so easy. Your reaction by viewing the above slab rates would be Wow! I can save some taxes yaar!
Using the above information on cutting the slab rates, let’s calculate the income tax payable for various income ranges.
|
Income (1) |
Old tax rates (2) |
New tax rates (3) |
Tax Saving (4) = (2-3) |
|
5,00,000 |
Nil |
Nil |
Nil |
|
7,50,000 |
62,500 |
37,500 |
25,000 |
|
10,00,000 |
1,12,500 |
75,000 |
37,500 |
|
12,50,000 |
1,87,500 |
1,25,000 |
62,500 |
|
15,00,000 |
2,62,500 |
1,87,500 |
75,000 |
The answer lies in details.