What to choose in 2022?
How to choose between the new and the old tax system?
The new tax system differs from the old one in two respects. First, it has more slabs with lower tax rates. And second, all major exemptions and deductions available to taxpayers under the existing old tax system are disallowed if the new tax system is elected. “Therefore, if the benefit of lower rates in the new tax regime exceeds the benefit of exemptions and deductions available under the old tax regime, then the taxpayer can choose the new tax regime,” said Archit Gupta, Founder and CEO of Clear.
The main difference between the old and the new tax regime is the difference in slab rates. Taxpayers in India have to pay income tax based on the slab system under which they fall. The tax slab is designed by considering the average income of individuals. Thus, taxpayers with higher incomes will be likely to pay more taxes.
The possibility of reducing the tax is also an important difference between the old and the new tax system. No deductions are allowed under the new tax system, but a taxpayer has many options under the old tax system.
“While the new tax system provides the taxpayer with zero deduction or exemption options, the old tax system provides about 70 deductions and exemptions to reduce their taxable income. The deductions allow taxpayers to reduce the amount of tax by saving, investing or spending on specific items,” said Amit Gupta, MD, SAG Infotech.
Which tax regime is the best?
Archit Gupta, Founder and CEO – Clear said that in order to know which tax regime is best, the taxpayer must calculate the income tax to be paid at the applicable normal tax rates, i.e. at the old rates tax slab, after taking advantage of all eligible exemptions and deductions from their income. For example, salaried persons can claim exemption for LTA, HRA, standard deduction of ₹50,000. In addition, individuals are permitted to claim a deduction under Section 80C up to ₹1.5 lakh, home loan interest deduction, NPS contribution, etc.
In addition, the taxpayer must calculate the income tax to be paid according to the rates of the tax slab of the new tax regime. Now they can compare and choose the tax regime that suits them best, he added.
Choosing an old or new tax regime is entirely up to you and will depend on your income structure, available deductions and circumstances.
“If you want to choose the new tax system, you will have to forget all the tax deductions and exemptions that the old tax system provides,” said Amit Gupta,
Who should opt for the new and who should opt for the old?
The choice between tax regimes may depend on various factors such as current income level, income composition i.e. sources of income, investment appetite and savings habits, among other factors. Individuals will need to determine their tax liability under the old and new tax regimes before deciding which is more advantageous.
“The Income Tax Department has also developed an easy-to-use calculator that shows which scheme would benefit based on tax output. While deciding to choose between the old and the new tax regime, one should consider the pros and cons of both regimes in order to make a wise decision,” said Akash Kumar, Director and Co-founder of Fincorpit Consulting Private limited.
The decision to opt for a new tax regime or an old tax regime depends on the taxpayer.
“We have observed that most taxpayers benefit from the old regime when they maximize Section 80C and opt for the tax deductions and benefits available in their salary structure, such as applying for HRA, receiving part from the CTC in the form of reimbursement, etc. Only 10% of the total of the filers on Cleartax benefited from the old regime and opted for this one,” said Archit Gupta.
We also observe that the younger population, which has few tax investments, opts for the new tax system.
“Many taxpayers are opting for the new regime because they want to avoid locking in funds under Section 80C investments, which has a lock-in period. These taxpayers are choosing to invest in FDs rather than locking their assets into tax-saving options for 3-5 years,” said Amit Gupta.
Is it allowed to switch several times between the old and the new tax regime?
If you are an individual employee, you can make this choice each year. “People with income under ‘Salary’, ‘Home ownership’, ‘Capital gains’ and ‘Other sources’ can choose each year to switch between the old or the new tax regime. But people who have business or professional income have only one chance to return to the old regime after opting for the new tax regime. They can only choose the new tax regime once in their lifetime,” explained Archit Gupta.
Never miss a story! Stay connected and informed with Mint. Download our app now!!