In Union Budget 2020, Finance Minister Nirmala Sitharaman has acceded to the demand, but with a caveat: to take the ‘simplified’ tax structure, you will have to let go of a host of exemptions and deductions offered so far.
The current income-tax regime and the new one will exist simultaneously, with the option of choosing between the two. You, the taxpayer, will now have to decide which one works for you. Ironically, the ‘simpler’ tax regime comes with embedded complications, triggering confusion rather than a sense of relief. Here is a five-point guide to making the right choice.
Plan ahead to take an informed call
There is no single answer to the ‘switch or stick’ question. And, it doesn’t just depend on your income or salary structure. You also need to look at your investment habits, your age, life-stage, goals, responsibilities and likely expenses. You will have to plot your actual income and deduction figures to decide whether to switch or not.
For example, if you are a young individual and dislike paperwork, and claim little or no tax-saver benefits, the new regime might sound inviting. Forgoing these tax benefits to ensure more money in your hands will not be a difficult choice to make.
However, for those who do take multiple tax breaks, the older regime will help save more on taxes.
Therefore, financial planning is now more critical than ever. Start planning right away to be prepared to take a call before your employers ask you to submit your proposed investment declarations, from the April of every year. Your employer deducts your tax from your salary through the year on the basis of the indicative declarations you make. Even those who have documentation-phobia will have to put themselves through this process at least once. “Salaried tax-payers have the option of switching between the regimes, something that those who draw business income do not have. So, if you are a salaried individual, you can always change your course next year,” says Ameya Kunte, Founder, Globeview Advisors, a tax consulting firm.
Old is gold for most
Financial advisors are unanimous in their opinion: the older regime is better for most if you have been availing of multiple tax benefits, mainly those that give you an impetus to invest, such as section 80C and 80CCD tax benefits. “In most cases, the old regime will turn out to be beneficial. Only those who did not make an effort to invest in section 80C’s avenues and avail of other deductions or could not utilise this Rs 1.5-lakh limit due to higher expenses could find their tax outgo going down in the new regime,” says Pankaj Mathpal, a Mumbai-based financial planner.
For example, if your total income is Rs 7.25 lakh or Rs 10 lakh and you take 80C benefits and standard deduction, your tax outgo will be lower by Rs 18,720 and Rs 3,120 respectively in the old regime vis-à-vis the new one. Those earning say Rs 15 lakh could save Rs 14,820 in the new regime.
However, most individuals also utilise other benefits apart from the section 80C. For instance, house rent allowance (section 10), home loan interest paid of up to Rs 2 lakh (section 24B), health insurance premium paid of up to Rs 25,000 for those under 60 (section 80D), NPS contribution of up to Rs 50,000 [section 80CC D(1B)] help a great deal in bringing down the taxable income. So, if you earn Rs 15 lakh and also pay a home loan interest of Rs 2 lakh, besides claiming standard deduction and section 80C tax deduction benefits, you will be poorer by Rs 47,850 in the new regime. Put simply, the higher the number of deductions and exemptions, the better it is for you to stick to the old regime.
