What is the Old Tax Regime?
Finance Minister Nirmala Sitharaman introduced a new regime for the income tax rate for taxpayers in India in the new budget for 202021. The new budget aims to reduce the likelihood of saving incentives and place more money in taxpayers' hands.
However, individuals and Hindu United Families (HUF) are provided the option of choosing between the old and the new tax regime. Under the old tax regime, taxpayers benefited from a range of tax exemptions and deductions, which is not possible when transitioning to the new framework.
So what should be our choice? Read on to find out.
Under the old tax regime, taxpayers benefited from a range of tax exemptions and deductions, including health care tax deductions and ELSS expenditure under section 80 C and house rent allowance, which is not possible if you transfer to the new framework since the current tax framework does not give deductions such as the old one. In simple words, if you are a salaried taxpayer, you would have to forgo the deductions available under the old tax regime under Chapter VIA, such as savings under Section 80C, HRA, health insurance premiums, etc. The surcharge rates for the old tax regime are 10 for INR 50 lakhs to INR 1 Crore, 15% for INR 1 Crore to INR 2 Crores, 25% for INR 2 Crores to INR 5 Crores, and 37% for Rs. 5 Crores.
What are the Existing Rates Offered in this?
The following table shows the rate slabs for the old tax regime.
Annual Income (Rs.) Old Tax Rate
- Up to INR 2.5 Lakhs Nil
- INR 2.5 lakhs to INR 5 lakhs 5%
- INR 5 lakhs to INR 7.5 lakhs 20%
- INR 7.5 lakhs to INR 10 lakhs 20%
- INR 10 lakhs to INR. 12.5 lakhs 30%
- INR 12.5 lakhs to INR 15 lakhs 30%
- INR 15 lakhs and above 30%
What are the Exemptions, Exclusions, and Deductions in the Old Tax Regime?
Following is the list of exemptions in the old tax regime
- Standard deduction
- House rent allowance
- Section 80C investments
- Housing loan interest
- Medical insurance premium
- Education loan interest
- Leave travel allowance
- Savings bank interest
Apart from the Above Exemptions, the Old Tax Regime also Allows for Deductions as Follows:
- Deduction under section 80C, 80CCC, 80CCD 80G, 80GG, 80GGA, 80GGC 80E, 80EE, 80EEA, 80EEB Deduction under section 80D, 80DD, 80DDB 80IA, 80IAB, 80IAC, 80IB, 80IB
An individual using NO deductions under the old tax regime should opt for a new tax regime.
It will offer him higher disposable income under the new tax regime due to lower tax rates. Additional tax savings can either be spent or invested accordingly.
An individual with deductions up to INR 2 lakhs (such as standard deduction and deduction U/s 80C) can also opt for a new tax regime to save more tax after considering that he spends more than the break, as shown in the previous table. An individual with very high deductions such as HRA, 80C, 80D shall benefit from the old tax regime by claiming those deductions and saving money.
Who Should Stick to this Old Tax Regime?
You will not benefit from the new scheme if you have tax exemptions & deductions (in a year) greater than INR 2.5 lakhs that apply to the income category above INR 15 lakhs. If your NPS contribution, HRA exemption, Location loan interest claims are more than INR 50,000 then sticking to the old scheme will be advantageous to you. Basically, the higher the investment and deductions, the easier it is to abide by the old tax regime aside from the standard deduction. However, according to the finance minister, a taxpayer with an annual income of INR 15 lakhs will save INR 78,000 under the new tax regime. But if you are a saving type person, then stick to the old tax regime.
The new income tax regime would accommodate those who do not demand too many deductions or do not want to escape tax preparation paperwork. This may include non-salaried taxpayers (including consultants) who are not eligible for exemptions and deductions under Section VIA.
It may also include senior citizens who do not earn a pension from their employer and are thus not eligible for a standard deduction of INR 50,000. However, senior citizens receive a substantial portion of their interest income and enjoy INR 50,000 for interest income under the newly implemented section 80TTB. They would be better off under the old scheme.
Both tax systems have their own pros and cons. Know the difference between the old tax regime and new tax regime before deciding. The old tax system instills a habit of saving in a taxpayer. The new tax regime is beneficial for workers with a reduced wage and a lower investment resulting in lower deductions and exemptions.
The new tax system is safer and easier, with fewer records and fewer tax evasion fraud opportunities. Everyone will have their own basket of deductions and exemptions, so the two regimes need to be compared comparatively to see what works best for each individual.
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