This Is How Smart People Save Taxes!

During the budget 2020 speech, finance Minister Nirmala Sitharaman finally announced the new tax regime. Based on the avenue, the new regime has lower tax rates and more tax slabs in India, which has been demanded for a long time by taxpayers.

However, there’s a pretty-curious catch to it. With the new regime, all of the exemptions and deductions that you used to enjoy under the old regime for tax saving have been removed. And to leave you stranded, the authorities left you to choose either between the two regimes.

What everyone thought is oriented to make tax laws simpler in India made it even more complex instead. Just in case you’re confused about whether you should choose the older tax regime or the newer one, don’t sweat because you’re not alone.

Let’s discuss the various aspects of the new and old tax regimes in India to help you choose the one that fits the bill for you in terms of tax saving.

The New Tax Regime – Are More Tax Slabs Beneficial?

As stated above, the new tax regime has increased the number of tax slabs in India and lowered the tax rates for taxpayers below the Rs. 15 Lakh range. Additionally, the new regime also eliminates the possibility of using tax saving plans for tax saving as all these deductions are disallowed.

Here’s a table that compares the old tax rates with the new ones:

Slab Old Tax Rate New Tax Rate
0 – 2,50,000 0% 0%
2,50,000 – 5,00,000 5% 5%
5,00,000 – 7,50,000 20% 10%
7,50,000 – 10,00,000 20% 15%
10,00,000 – 12,50,000 30% 20%
12,50,000 – 15,00,000 30% 25%
15,00,000 & above 30% 30%

 If you choose the new regime and earn somewhere between Rs. 5 Lakh to Rs. 7.5 Lakh, your liable tax rate will be 10%. Alternatively, if your income lies anywhere between Rs. 7.5 Lakhs to Rs. 10 Lakhs, the total tax rate for you will be 15%.

For the older tax slab, the tax rate would have been 20% for the entire income slabs we discussed above. This means that the most recent tax slab divides the Rs. 10 Lakh or more slab into three different parts with a tax rate of 30% for Rs. 15 Lakh or more, 25% for Rs. 12.5 lakh – 15 Lakh, and 20% for Rs. 10-12.5 Lakhs.

Choosing The New Tax Regime – Are the Reduction Options Worth It?

Based on the old tax regime, the government of India granted more than seventy tax deductions and exemption options through the addition of clauses in the prevailing laws of the Income Tax Act of India, allowing you to reduce your overall tax liability.

The exemptions are essentially a part of your salary, for instance, the Leave Travel Allowance or the House Rent Allowance. Deductions, on the other hand, facilitate tax saving through practices like saving, spending, or investing under certain specific terms.

One of the most popular modes of tax deduction is section 80C of the Income Tax Act of India, which allows you to enjoy a deduction of up to Rs. 1.5 Lakhs and can be availed through several tax saving plans available in the financial market.

In addition to this, you can also enjoy other tax benefits and concessions through several other sections, including the interest that you pay for a home or education or the premiums for general health insurance.

If you combine the deductions and exemptions offered under the old tax regime, you may notice that it allows you to bring down your total taxable income by lakhs. However, it requires you to be aware of your savings and investments to ensure that your taxable income is minimized adequately.

Which Tax Regime is Better?

Talking about which regime is better from a tax-saving perspective, it all comes down to personal preferences. The vagueness and complexity of the Indian tax laws have made it overwhelming to determine an ideal tax regime for yourself.

While the reduced tax rates seem better at first glance, a person with an income of Rs. 7.5 Lakh will still have to pay Rs. 25,000, and the amount goes to Rs. 37,500 for people with an income of Rs. 10 lakhs. However, to enjoy these savings, you have to give up all your deduction and exemption benefits.

At this point, you may need to make a few considerations before you make your mind. For instance, if you’re living on rent, you must claim HRA, which is one of the biggest exemptions for individuals available in India.

Additionally, there are various other tax-free components such as phone bills, LTA, food bills, and more. If you choose to proceed with the new tax regime, all of these components will become taxable from your annual income.

For salaried taxpayers, there are two major deductions namely standard deduction (Rs. 50,000) and contribution towards Employee Provident Fund. Even these deductions have been removed from the new tax regime.

What’s more, you’ll also miss out on the deductions that you could claim earlier for your home loan and tax saving plans. Until now, these plans and policies have helped a lot of people enjoy tax savings to a greatly considerable extent.

Combining the exemptions and deduction options you can enjoy based on your present lifestyle may help you gain an idea about which tax slab is better for you. Make sure you choose the one that drives the minimum reductions from your income.

Final Words

The new tax regime appears like a double-edged sword, with reduced tax rates and additional slabs but no deduction or exemption benefits. That’s why you need to be calculative with your decision as you cannot step back once you have finalized either of the two tax slabs in India.

With the information you’ve just gained, you can assess your financial situation better and determine which tax slab will be the most profitable for you. Therefore, identify your situation in these circumstances and determine what fits the bill for you.

About The Blogger Scientist 12310 Articles
The Blogger Scientist is a "Medical Physiologist" and a "Financial Asset" Content Creator who aims at enlightening web reader on varying Financial Assets such as Stocks, FX, Crypto, MLM,. HYIP among others.

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