CashCow Chapter 5.1 – Tax Saving

From this financial year (FY 2020-21) you have the option to choose to pay income tax under the new tax regime.

The new tax regime has a lower tax rate with a higher number of income slabs and zero deductions/ exemptions as compared to the old tax regime.

The government has allowed you to choose either option for tax computation. This has created confusion in the minds, whether the new or old tax regime is better for tax saving.

Let us compare both the tax slabs and try to find out which option is better for you. Below are the slabs:

Old & New Tax Regime

In case, if you opt for the new tax regime then you will have to give up exemptions and deductions available under various provisions of the Income-tax Act, 1961.

Let’s understand with the help of different scenarios to know which option is more beneficial for you.

Scenario 1 – Income up to Rs. 5 Lakh

You will be eligible for a full tax rebate if your taxable income is up to Rs. 5,00,000. So, it does not make any difference between both options.

Scenario 2 – Income exceeds Rs. 5 Lakh

Suppose, you are earning over Rs. 5 Lakhs and if you are not claiming any deductions then opt to pay taxes under the new tax regime because the tax amount is lower at all income slab levels as shown in the table below.

Tax cal under old and new tax regime

But, in case you are claiming tax deductions:

You can claim the following deduction under the old tax regime only (considering major deductions only)

  • Deduction under 80C – Rs. 1.5 lakh
  • Saving account interest (80TTA) – Rs. 10,000
  • Medical insurance premium (80D) – Rs. 25,000
  • Medical insurance for parents – up to Rs. 50,000
  • Interest on home loan (24) – Rs. 2,00,000
  • Standard deduction for salaried – Rs. 50,000
  • HRA (80GG) – Upto Rs. 60,000 (if not part of salary)

Suppose, your salary is Rs. 15 Lakh and if you are claiming these deductions then you would have to pay lower taxes if you opt for the old tax regime.

Let’s suppose you’re claiming the deductions at their full amount. The total deduction amount will be Rs. 5,45,000 and your taxable income comes to Rs. 955,000.

And your gross income – Rs. 15,00,000

Deductions – Rs. 5,45,000

Taxable income – Rs. 9,55,000

Tax – Rs. 1,07,640 (including 4% health & education cess)

You need to pay a tax of Rs. 1,07,640 instead of paying Rs. 195,000 under the new regime.

But remember, this is not the absolute number and will change for you based on your deductions amounts that you are claiming under the old tax regime.

So, make your own calculation and then choose which tax regime is more beneficial.

Your assignment

Calculate your tax liability for both regimes and find out which one you should opt for.

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