Old versus new income tax regime: Which suits your needs?

Finance Minister Nirmala Sitharaman, in her Budget speech, announced a new, simplified income tax regime for taxpayers with revised income tax slabs and tax rates. While the government has introduced a new tax regime with revised slabs and rates, those availing these new slabs will not be eligible for rebates and exemptions.

"The new tax regime shall be optional for the taxpayers. An individual, who is currently availing more deductions and exemption under the Income Tax Act may choose to avail them and continue to pay tax in the old regime," she said in her speech.

The Budget offered taxpayers the option to pay tax as per the new regime under reduced rates with no exemptions. Under the new tax regime, taxpayers will not be eligible for rebates and exemptions. They can avail rebates and exemptions by staying in the old regime and paying tax at the existing higher rate.  

Under the new tax regime, taxpayers will have to pay no tax for annual income up to Rs 2.5 lakh. Individuals earning a salary between Rs 2.5 lakh and Rs 5 lakh will pay 5 per cent tax. While income between Rs 5 and 7.5 lakh will be taxed at 10 per cent, earning of Rs 7.5 and 10 lakh to levy 15 per cent tax. Taxpayers will have to pay 20 per cent and 25 per cent tax for incomes between Rs 10-12.5 lakh and Rs 12.5-15 lakh, respectively. Income above Rs 15 lakh will be taxed at 30 per cent.

The new tax regime, though optional, will need taxpayers to forego various tax exemptions available in the old regime. So, the net benefit under new tax structure may not be positive for all taxpayers. One needs to do a proper planning of the actual tax savings before switching to the new regime if you are already claiming deductions under 80C or 80D under old tax regime.

Krishna Kumar Karwa, Managing Director - Emkay Global Financial Services, said, "The option to individuals to opt for a lower tax slab structure with no deductions or to continue with the earlier higher slabs with deductions for home loan EMIs , investments in insurance etc seems slightly confusing. In a country like India with a young population with poor social security it is imperative to incentivise young India to save for the future and own a house as well," says Krishna Kumar Karwa, Managing Director - Emkay Global Financial Services.

On top of it, the option to choose the old or the new income tax regime will just complicate filing income tax returns which was already a complicated process for individual tax payers, says Ankur Choudhary, Co-Founder & CIO, Goalwise.com.

However, if you are an NPS subscriber, you can continue to avail deduction under Section 80CCD(2) if your employer contributes towards your NPS account. "NPS deduction of 10 per cent from employer is the only tax benefit in the new tax regime because section 80CCD (2) has been kept independent. Employees with Rs 15 lakh salary may prefer opting for NPS more," he says.

By Chitranjan Kumar