Old or new, which tax regime suits you?

There has been a lot of debate on the old and new tax regime. Recently, a survey by online insurance platform, Policy Bazaar said 63 percent of the people paying income tax want to continue with the old tax regime while 37 percent want to remain with the new tax regime. People from 350 cities, totalling 1,263, took part in the survey. According to the survey, 71 percent of the people choose the tax regime on the basis of a lot of calculations. While 74 percent women calculate their tax liability under both the tax regimes, whereas this figure among men is 71 percent.

Looking at this survey, questions are bound to arise in anyone’s mind. The government has taken several steps to promote the new tax regime in the budget for the financial year 2023-24. Basic exemption limit has been increased from Rs 2.5 to Rs 3 lakh. The number of tax slabs has been reduced from 6 to 5. After rebate, income up to Rs 7 lakh has been exempted from tax. Standard deduction of Rs 50,000 is given for salaried people. Surcharge is reduced for high earners. Yet taxpayers do not seem to be disillusioned with the old tax regime. What is the reason for this? Why people do not want to go from the old to the new tax regime? While the tax rate is lower in the new regime, which tax regime is right for whom? Let us find out.

The number of people filing Income Tax Returns i.e. ITR in the country is increasing. Over 8 crore people have filed returns in the financial year 2022-23. The Finance Ministry told Parliament in December that out of this, about two-thirds i.e. 5.16 crore people were those whose tax liability was zero, that is, overall only 2.24 crore people paid tax.

The government had introduced a new tax regime in the financial year 2020-21. The tax rates were kept low. There were changes in the new tax regime in the budget of this financial year too. The new regime has now become the default option. It means that to avail the benefits of the old tax regime, you will have to opt for it. However, despite all the efforts, it has not been able to make any significant mark among the taxpayers. Old tax regime still remians the choice of most of the tax payers.

Now let’s talk about the reasons why people like the old tax regime. The old tax regime has around 70 exemptions including House Rent Allowance (HRA), LTA, 80C, 80D, tax exemption on home loan interest and NPS. There are deductions, which help in reducing taxable income and tax liability. Apart from this, the old regime is preferred by people because of inculcating the habit of saving, earning tax-free returns from long-term investments like EPF-PPF & NPS and saving up money for retirement.

Let us talk about some common exemptions and deductions included in the old tax regime, which are used by most of the taxpayers.

First of all, deduction of up to Rs 1.5 lakh can be taken in Section 80C by investing in various schemes like Employee Provident Fund (EPF), Public Provident Fund (PPF), Life Insurance. Apart from this, there is an additional deduction of Rs 50,000 on investment in NPS. This way, tax can be saved on investments up to Rs 2 lakh.

Similarly, there is a deduction for health insurance premium in section 80D. A deduction of Rs 25,000 is available on the policy premium of self, wife and children. This limit for senior citizens is Rs 50 thousand. If you yourself and your parents are senior citizens, then you can avail the deduction of up to Rs 1 lakh.

The third important thing is that exemption can be taken on house rent under House Rent Allowance i.e. HRA. The actual amount received as HRA is,
– 50 percent of basic salary in metro city and 40 percent in non-metro city
– The amount left after deducting 10% of the annual salary from the annual house rent.
Deduction can be taken on the lesser of the three.

Apart from this, under Section 24, deduction of up to Rs 2 lakh is available on home loan interest.

The old tax regime encourages tax saving along with secured life, health, retirement planning and long term wealth accumulation. Whereas the new tax regime says that you earn and pay less tax on it. Future savings are in your hands. The initial estimate of the Revenue Department is that in the current financial year i.e. FY 2023-24, about 5.5 crore people could choose the new tax regime. The taxable income of most of these taxpayers will be up to Rs 7 lakh.

If you do not want to make any investment to save tax, then you can go to the new tax regime, where tax rates are lower but there are no exemptions and deductions. If you have a home loan, take advantage of HRA, 80C and NPS, then go for the old one.