Within the Union Budget 2020, the government announced a new income tax system. This new system offers lower tax rates and more slabs. However, it doesn’t allow taxpayers to take advantage of exemptions or deductions. This has caused much confusion among taxpayers regarding the best tax regime.
We will look at the differences between the tax regimes of the past and present regimes in this piece, along with their benefits and drawbacks, as well as examples of taxes you have to pay in both situations to make the right decision based on your knowledge.
Old Tax Regime
The tax system of the past is the old income tax system which has been in operation in India for a long time. It has many deductions and exemptions that can drastically reduce your tax liabilities. However, taxes under the previous regime were quite excessive.
New Tax Regime
The new tax regime provides lower tax rates as well as more slabs. There are no deductions or exemptions under the new system, which means the tax bill will be more significant than it was under the previous regime. But, the new system is easier and simpler to follow.
Advantages of the Old Tax Regime
The tax system that was in place before HTML0 provides a variety of benefits which include:
- There are a variety of deductions and exemptions that can substantially reduce tax burdens.
- You can select the most effective deductions and exemptions to suit your specific situation.
- A more accessible system that permits you to claim deductions and immunities which aren’t available under the current system.
Exemptions are a part of your pay and are identified under specific allowance categories, which are tax-free. The amounts that qualify are directly deducted when calculating taxable income. Examples of exemptions include House Rent Allowance (HRA) and Leave Travel Allowance (LTA). Deductions, however, permit you to lower the tax burden by investing in specific items. For instance, by investing in eligible heads, Section 80C lets you reduce your tax-free income by as much as Rs 1.5 million. Additionally, the home loan, health insurance for your family, yourself, and your parents may also qualify for deductions.
Disadvantages of the Old Tax Regime
The tax system that was in place before the reforms have its own set of drawbacks that include:
- Slabs have more tax burdens than those under the new system.
- A more complicated strategy that is difficult to comprehend and comply with.
- There is a chance of not getting on deductions and exemptions you have the right to.
Advantages of the New Tax Regime
The new tax system has many advantages, which include the following:
- Multiple slabs have lower tax rates compared to the older tax regime.
- A simple system that is easy to comprehend and follow.
- There is a chance of paying lower taxes under the old system.
Disadvantages of the New Tax Regime
The new tax system also comes with a variety of disadvantages, which include:
- There are no exemptions or deductions, Which means your tax burden is higher than it would have been under the previous regime.
- The system needs to be more flexible, which does not permit you to select the most advantageous exemptions and appropriate deductions for your particular situation.
Which Regime Should You Choose?
The tax system of the past is more slender than the current system. The best tax structure for your needs depends on your income, investment choices, and the specific circumstances of your life. If you’re a high-income earner that can benefit from a wide range of deductions and exemptions, the tax system of the past could be the best option for you. However, if you’re an income-based worker with a low-income level or don’t claim any exemptions or deductions, the new tax system could be a better choice for you.
Here’s a comparison of the tax slabs in both tax systems:
It is important to note that the numbers above are estimates based on the present taxes and tax rates. It is essential to be aware of any changes to tax laws and speak with tax professionals for accurate calculations.
Deciding between the new and old tax system requires thoroughly analyzing your financial situation and goals. Although the tax system of the past provides a variety of exemptions and deductions, it is often complicated and lengthy. On the other hand, the new tax system provides ease of use and lower tax rates, but it could eliminate certain deductions. It is essential to analyze your financial circumstances, consider each tax system’s pros and cons, and seek expert advice for an educated choice that will maximize your tax advantages. Be up-to-date with the most current tax regulations and seek advice when needed.