Do you know when old and new tax regimes give the same tax liability? Here are the calculations

The finance minister has proposed to revise tax rates for the new tax regime. This has certainly made it better compared with the existing new tax regime, as along with reduced tax rates it also allows standard deduction which was earlier not available. Though there is no dispute that the revised new tax regime is better than the existing one, the situation varies if one compares it with the old tax regime after including eligible expenditures and long-term investments. 

“The choice between the old tax regime and the proposed new tax regime depends on the income of the individual and the deductions/ exemptions available to the individual. For an individual who has only a deduction under section 80C of Rs 1,50,000, the revised new tax regime would be more beneficial. In case of an individual who has a housing loan and other deductions, the old tax regime may be more beneficial.  If total deductions of Rs 4,25,000 is considered, it appears that income tax under both old regime and the proposed new tax regime is the same for a gross income of Rs 16,00,000 and above. Proposed new tax regime thereafter will be beneficial for taxpayers whose taxable income is above Rs 5 crore due to a reduced surcharge of 25 percent,” says Neeraj Agarwala, Partner, Nangia Andersen LLP.

The back-of-the-envelope calculation shows that if one considers a deduction of Rs 4.25 lakh (which includes the standard deduction of Rs 50,000, Rs 2 lakh for home loan interest deduction u/s 24B, Rs 1.5 lakh deduction under section 80C, Rs 25,000 under section 80D for health insurance) the tax liability is the same for a gross income of Rs 16,00,000 and more. Check the table below for details.

The main difference between the old and new tax regimes is that under the new tax regime, you cannot avail of deductions such as 80C, 80D, and 24B. While you can reduce your taxable income under the old regime by adjusting deductions and exemptions. 

Generally, the new regime seems to be more favourable if you don’t have investments to claim as deductions. However, people having income upto 16 lakhs and availing deductions like interest on home loans, health insurance, and PPF would need to evaluate as in their case, the old regime could still prove more tax efficient. Though,  it would vary from case to case. However, it is clear that people having a high-income range or people not having enough requisite investments or expenditures would benefit under the new regime.

The good part is tax rebate limit has been increased to Rs 7 lakh under the new tax regime. Under the old tax regime, the tax rebate limit is Rs 5 lakh. So, people having income up to Rs 7.5 lakh (standard deduction of Rs 50,000) will not have to pay taxes in the new regime. “Currently, those with income up to Rs 5 lakh do not pay any income tax in both old and new tax regimes. I propose to increase the rebate limit to Rs 7 lakh in the new tax regime. Thus, persons in the new tax regime, with income up to Rs 7 lakh will not have to pay any tax,” Nirmala Sitharaman said in the budget speech. 

“This will provide major relief to all taxpayers in the new regime. An individual with an annual income of Rs 9 lakh will be required to pay only Rs 45,000. This is only 5 per cent of his or her income. It is a reduction of 25 per cent on what he or she is required to pay now, ie, Rs 60,000. Similarly, an individual with an income of Rs 15 lakh would be required to pay only Rs 1.5 lakh or 10 per cent of his or her income, a reduction of 20 per cent from the existing liability of Rs 1,87,500," said the finance minister.