If you’re planning to shift to the New Tax Regime, it's crucial to understand a few important details before making the switch. Introduced in the Union Budget for the financial year 2020-21, the New Tax Regime promised simplified tax slabs and reduced tax rates. The goal was to make income tax filing easier and potentially lighten the tax burden for individuals.
However, despite its launch several years ago, only a small percentage of taxpayers have actually moved from the Old Tax Regime to the New one. Why is that? One major reason is the way tax exemptions and deductions work under the two systems.
The Old Tax Regime offers a wide range of exemptions and deductions, allowing individuals to lower their taxable income significantly. Investments in schemes like Public Provident Fund (PPF), National Pension System (NPS), tax-saving fixed deposits, insurance premiums, and even expenses like house rent or home loan repayments can all help in reducing the overall tax liability.
On the other hand, while the New Tax Regime features lower income tax rates across several slabs, it removes almost all the common exemptions and deductions. This means taxpayers cannot claim benefits for investments or expenses that were earlier helping them save on taxes. As a result, even though the rates are lower, the actual tax savings might not be as much as they appear at first glance.
Even today, a large number of taxpayers continue to favor the Old Tax Regime over the new one. Here's why:
Higher Tax Savings Through Deductions:
For individuals who actively invest in tax-saving instruments and claim deductions under sections like 80C, 80D, and 24(b), the Old Regime offers significant savings.
These deductions, when used wisely, can lower taxable income by lakhs of rupees.
Benefit of Long-Term Financial Planning:
The Old Regime encourages individuals to invest in long-term financial products, helping them not just with tax savings but also with building a robust financial future.
Customization Based on Personal Expenses:
Deductions for education loans, medical insurance, and house rent allow taxpayers to align their tax-saving strategy with their lifestyle needs.
Familiarity and Comfort:
Since the Old Regime has been around for a long time, many people are more comfortable with its structure and feel less inclined to shift to a newer, unfamiliar system.
While the New Tax Regime can be beneficial for certain groups, such as individuals with lower income who don’t claim many deductions, it might not be the best choice for everyone. Those who have significant investments and expenses qualifying for tax benefits often find the Old Regime more advantageous.
Before deciding to switch, it is advisable to calculate your total tax liability under both regimes. You should factor in the deductions you are eligible for and evaluate which regime helps you retain more of your hard-earned money.
Remember, salaried individuals have the option to switch between regimes every financial year, but business owners must be more cautious, as they are allowed to switch back only once.
Switching to the New Tax Regime isn’t a one-size-fits-all decision. It largely depends on your financial planning, investments, and eligibility for various deductions.
Take your time, do the math, and if needed, consult a tax expert before making the move. Choosing the right tax regime can make a big difference in how much tax you ultimately pay — and how much you save!
