How to Choose the Right Tax Regime: Old vs. New for Individuals
Since 2020, individual taxpayers in India have had the option to choose between two tax regimes: the traditional (old) regime with various deductions and exemptions, and the new regime with lower slab rates but no major deductions. Making the right choice is crucial as it directly impacts your tax outgo.
The Old Tax Regime: A Quick Recap
This is the regime everyone was familiar with for decades. Its main feature is the availability of over 70 deductions and exemptions. Key ones include:
- Deductions under Section 80C (up to ₹1.5 lakh for EPF, PPF, ELSS, etc.).
- Deduction for health insurance under Section 80D.
- House Rent Allowance (HRA) and Leave Travel Allowance (LTA).
- Deduction on home loan interest (Section 24).
- Standard Deduction of ₹50,000 for salaried individuals.
Who should consider it? Individuals who make significant use of these deductions. If your total claimable deductions are high (typically above ₹2.5 - ₹3.75 lakh depending on your income), the old regime is likely more beneficial.
The New Tax Regime: Simplicity and Lower Rates
The new regime was introduced to simplify the tax structure. It offers lower, more attractive slab rates but requires you to forgo most of the popular deductions mentioned above. The Standard Deduction of ₹50,000 and NPS employer contributions are some of the few deductions still allowed.
The tax slabs under the new regime (which is now the default regime unless you opt out) are:
- Up to ₹3 lakh: Nil
- ₹3 lakh to ₹6 lakh: 5%
- ₹6 lakh to ₹9 lakh: 10%
- ₹9 lakh to ₹12 lakh: 15%
- ₹12 lakh to ₹15 lakh: 20%
- Above ₹15 lakh: 30%
Who should consider it? Individuals who do not have many investments or expenses to claim as deductions. This could include young professionals starting their careers or those who prefer financial liquidity over locked-in investments.
How to Make the Choice?
There is no one-size-fits-all answer. The best way is to do the math:
- Calculate your taxable income under the old regime after claiming all possible deductions.
- Calculate your tax liability based on the old regime's slab rates.
- Now, calculate your taxable income and tax liability under the new regime's slab rates.
- Compare the two tax liability figures. The one that results in lower tax is the better choice for you.
The Income Tax Department provides an online tax calculator on its portal to help you compare the two regimes easily.
For salaried individuals, you can make this choice every year. Careful evaluation based on your financial situation is key to optimizing your tax outgo.