Which income tax system should you choose after analyzing tax savings?

New Delhi: It's that time of year once more! Making the appropriate choice about the tax regime to adopt for the year—the old or the new one—is crucial given that the new fiscal year has already begun. The new individual income tax regime, unveiled in the 2020 budget, has been available for three years.

What should you decide for the current fiscal year? Let's contrast the two tax systems to see which one best meets your requirements.

Under the old tax regime

The old tax system was the one in effect prior to the implementation of the new tax system in 2020. Individuals were taxed according to the Income Tax Act, 1961 established income tax slabs under the previous tax system. Individuals with incomes up to Rs. 2.5 lakhs paid no tax; after that, the tax rate increased in progressive slabs, reaching a maximum of 30 percent.

Apart, people could use a number of deductions and exemptions, including Sections 80C, 80D, and others, to lower their taxable income.

Under the new tax regime

The new tax system was implemented in 2020 to lend tax advantages to taxpayers willing to give up certain exemptions and deductions. Individuals can opt to pay tax at lower rates under the new tax system, but they must forgo some exemptions and deductions.

The new tax rates can be as high as 25 percent, depending on the taxpayer's income, or as low as five percent. People who opt for the new tax system must forgo the exemptions and deductions provided by Sections 80C, 80D, and so forth.

Additionally, these taxpayers are not eligible for the transportation allowance or the house rent allowance’s tax benefits. Individuals who receive income from share trading and other types of capital gains are also eligible for tax benefits under the new tax system. People have the choice to continue with the previous tax system if they want to be able to take advantage of exemptions and deductions; the new tax system is optional.

(Income Tax Rates under the New Tax Regime)

How to choose between the new and old tax regimes?

The taxpayer’s specific needs and circumstances should determine whether to choose the old vs new tax regime. Taxpayers must evaluate their tax savings options to determine which one is best for them. Before making a decision, one should take into account factors such as age, overall income, existing investments, etc. For taxpayers that have a large number of potential tax deductions and exemptions, the old tax system is advised.

This is so because there are more exemptions and deductions under the previous system. The new system is advised for taxpayers that earn more money, do not have access to many deductions, and want to benefit from the lower tax rates. The decision ultimately comes down to the person's financial circumstances.