Which Income Tax Slab Is Better Old Or New?
- The income of an individual is subjected to direct tax levied by the Government of India.
- The term income has to be viewed on a broader aspect of taxation.
- It not only includes the salary of the individual but also other sources of earning as well.
- The income from house property, capital gains, profit from businesses are also applicable for income tax.
- The Income Tax Act, 1961, authorises the government to collect tax from the citizens of India.
Individuals have to pay income taxes depending upon the tax slab they are listed. The tax slab has prescribed different tax rates which keeps on progressing with the increasing income. There are also certain incomes and tax amounts that are usually waived by the government. This enables the individuals to avail of tax exemption and deduction in the taxation process. In 2018-2019, there has been a spike in the number of taxpayers with around 14%.
- The Indian budget 2020 witnessed some significant changes in the tax regime.
- Let’s understand the income tax slab under the old and new tax regime.
What Is New And Old Tax Slab?
- Most people were anticipating changes in the tax pattern when the budget of 2020 was announced.
- The new tax regime simplified the tax slabs with reduced taxes in the income slab.
- However, it came with a catch with the removal of the existing tax exemptions and reductions.
- It maintained a further skepticism by giving a preference between the old tax regime and the new tax regime.
- With the new tax regime, individuals get the privilege of lower tax rates, but there are no provisions to continue with the regular exemptions and deductions.
- This makes it a little complicated to pick between the old and the new tax regime.
The Old Tax Regime
- The old tax regime was a three-tier tax system with higher tax rates.
- While calculating the tax schemes, the individuals were allowed to claim benefits through tax deductions and exemptions.
- The government has provided taxpayers with more than 70 exemptions and deductions.
- The major deductions in the tax were available under the umbrella of Section 80C.
- At the same time, exemptions were included in the salary like the House Rent Allowance, Leave Encashment, etc.
- Through the right combination of these, one can easily save and bring down the taxable income.
- It requires the taxpayer to be more vigilant to optimise the taxable income.
The New Tax Regime
- The new tax regime is designed with a much simpler structure to promote a progressive taxation scheme.
- It accompanies a brighter side, by offering lower tax rates for low-income groups.
- However, any individual opting for the new tax slabs have to forgo certain tax deductions and exemptions that were available in the previous tax regime.
- Still, there are a few exemptions that apply to the new scheme.
The Old Tax Regime- Pros And Cons
- The old tax regime favoured the tax exemptions and deductions for the individual taxpayers.
- It promoted wealth creation through a healthy habit of earning a passive income.
- Moreover, one can get familiar with the culture of investment with the help of specified tax-saving tools.
- These little steps are a great move towards building a corpus for marriage, purchasing a house, financing education, and others.
- In the old tax regime, the tax-saving rate was approximately 30% with the domestic savings scheme being the major contributor.
- In case, individuals prefer to switch to the new regime, it will be interesting to take note of the tax-saving rate.
- This might attract the revival of the consumption and demand cycle.
- The investors in the old regime were allowed to invest in the specified instruments which might be risk-averse.
- This downside prevents them from investing in schemes that could have to bring about better results.
- The tax deductions that were offered under the old regime required investment in certain instruments that come with a fixed lock-in period.
- The longer tenure of the tax-saving scheme might not be suitable for senior citizens.
- They might prefer better investment instruments with open-ended tenure offering more liquidity and flexibility.
- The same applies to some spendthrift individuals.
- The old tax regime deals with a lot of paperwork in the assessment proceedings of tax departments.
- Documentation and proof of investment are necessary, which are not needed in the new tax regime.
The New Tax Regime- Pros And Cons
- The new tax regime is progressive, which means that there are concessional tax rates according to the individual’s income.
- Most importantly, deductions and exemptions have been decreased significantly, making the process simpler.
- This reduced the overall burden of paperwork and tax consultation for the taxpayers.
- The previous tax regime has specified investment tools through which the taxpayers used to claim their deductions.
- There was a restriction in choice for the best investment scheme in terms of both returns and lock-in period.
- This flexibility allows the new-age individuals to customize their investments as per preference and generate valuable returns through different open-ended schemes.
- The new tax regime favours a lower rate of tax, increasing the disposable income in the hands of individuals.
- This leaves the individual with more liquidity as they don’t have to invest in certain investment schemes to avail of tax discounts.
- The biggest drawback of the new tax regime is that taxpayers cannot avail of the advantage of many tax deductions schemes.
- Some of these deductions were good from the aspect of tax saving.
List of Tax Deductions
- House rent allowance.
- Leave travel concession.
- Special allowance ( educational allowance, hostel allowance, transport allowance, etc.).
- Deductions under sections 32AD, 33AB and 33ABA.
- Standard deductions.
- Additional depreciation under section 32.
- Exemption for SEZ unit under section 10AA.
- Allowance for clubbing of income of minors.
Which Income Tax Slab Is Beneficial? Old Or New.
- The new concessional tax regime seems to be much simplified when compared to the old tax regime, which required a fair amount of tax computation.
- This might appear to be simple to a layman, but the scope of comparison prevails.
- In the existing tax regime, the major advantage is the tax deduction and exemption that inculcates a generous habit of investment.
- The middle-class strata can draw this facility to their side and create funds for the future.
- The new tax regime is for the risk-taking millennials who like to invest in different investment schemes that offer better returns over time.
- In terms of flexibility and liquidity, the performance of the new tax regime has been welcoming.
- Even the taxation process is so straightforward that it doesn’t require unnecessary paperwork and tax consultations.
- Income taxpayers need to pay attention to both the tax regime so that they can select the best one for themselves.
- It is advisable to do an in-depth comparison and analysis between both regimes.
- Especially, the business owners need to be careful while choosing as there is no provision to change the tax regime later once it has been selected.
- The primary concern of the individual needs to be the financial goals and not the benefits procured from income tax.
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Q. How does the government collect tax?
Ans. The government generally collects the taxes by three means. (i) voluntary payment by the taxpayers. (ii) Tax deducted at sources (iii) Tax collected at sources. Despite all these measures, PM stated that the income taxpayers in the country are little above 1% of the country’s total population.
Q. Can the taxpayers change the tax regime later?
Ans. Yes, the salaried employees have the privilege to select between the old and the new tax regime. They can also inform their employers regarding the same. However, business owners have to decide between the two tax regimes. Once selected it cannot be changed at will.