While under the old tax regime the salaried individuals can continue paying taxes, as they had been doing till now; under the new regime, they will be liable to pay lower taxes, provided they forego their deductions and exemptions.
Budget 2020 has given taxpayers an option to continue with the existing tax regime or opt for the new proposed tax regime. Employees today are conflicted as to which regime they should really opt for and why? While under the old tax regime the salaried individuals can continue paying taxes, as they had been doing till now; under the new regime, they will be liable to pay lower taxes, provided they forego their deductions and exemptions.
Difference between the two tax regimes
Deductions/Exemptions
Main exemptions that taxpayers will have to forego if they opt for the new regime are Standard Deduction of Rs. 50,000 to salaried tax payers, House Rent Allowance for individuals staying in rented accommodation, Interest on housing loan for self-occupied property, Leave Travel Allowance twice in block of four years, the most commonly claimed deduction under section 80C for provident fund contribution, life insurance premium, school tuition fee for children, ELSS, PPF etc.
None of the above can be claimed under the new tax regime. A total of 70 exemptions have been done away with in the new tax regime.
Steps to opt for your preferred Tax Regime:
Step 1: Understand what suits you best
If your taxable income is below 5 lakhs or above 15 lakhs, then tax rates are same in both; hence the older regime that allows exemptions is more suited
Step 2: Check the exemptions
Out of all the exemptions that have been removed, check how many are applicable for you and how much money you can save by opting for those. This will help you in the next step.
Step 3: Do the Math
Based on your net taxable income post exemptions/deductions, calculate total income tax under old as well as new regime.
Step 4: Go beyond the numbers
Apart from taxable income, your lifestyle, life stage, short- and long-term priorities along with financial goals are excellent parameters to decide what type of tax regime you should opt for. With inflation, rising consumerism and growing needs, it’s important to start saving early and spend smart. The power of compounding has a great role to play in achieving your financial goals.
Step 5: Remember to plan well
It’s important to note that it is possible to change tax regimes every financial year, as both will exist simultaneously. First – time taxpayers may decide to choose the new tax regime as it’s simple to follow and translates to lower tax liability. However, in the long run, investments have financial benefits and taxpayers will want to go for the old regime as that will be more beneficial.
The current budget announcement has gone the extra mile to provide ample freedom of choice to each salaried individual. It’s best to understand every variable as you go along this checklist before making the switch. Freedom is yours, use it wisely.
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