Maximize Your Tax Savings: Choosing Between the Old and New Tax Regimes for Salaries Above Rs 10 Lakh
Navigating the Income Tax Filing Season: Choosing Between the Old and New Tax Regimes
As the Income Tax Return (ITR) filing season progresses, taxpayers find themselves grappling with a crucial decision: should they opt for the old tax regime or the new one? This dilemma often feels as uncertain as a coin toss, especially for salaried individuals earning Rs 10 lakh and above.
The common perception is that the old tax regime, with its exemptions under Section 80C of the Income Tax Act, 1961, is more beneficial. However, is it always the case that the new tax regime results in higher taxes? Should taxpayers who claim various deductions default to the old tax regime? Let’s delve into these questions, particularly for those with annual salaries of Rs 15 lakh, Rs 20 lakh, and Rs 25 lakh.
Maximize Your Tax Savings: Choosing Between the Old and New Tax Regimes for Salaries Above Rs 10 Lakh
Understanding the Differences: Old vs. New Tax Regime
The old tax regime offers a plethora of deductions and exemptions, making it seemingly attractive for many. Common deductions include:
- Section 80C: Deductions for investments in PPF, life insurance premiums, 5-year fixed deposits, ELSS mutual funds, school fees, etc., up to Rs 1.5 lakh.
- Section 80D: Deduction for health insurance premiums up to Rs 25,000.
- Section 24(b): Interest on home loans for self-occupied properties up to Rs 2 lakh.
- Section 80TTA: Interest earned on savings bank accounts up to Rs 10,000.
In contrast, the new tax regime offers lower tax rates but does not allow these exemptions and deductions. To aid taxpayers in making an informed choice, Chintan Ghelani, Associate Partner at N.A. Shah Associates, provides a detailed comparison of the tax payable under both regimes for individuals earning Rs 15 lakh, Rs 20 lakh, and Rs 25 lakh annually, considering two scenarios: deductions below Rs 3.75 lakh and deductions of Rs 3.75 lakh and above.
Comparative Analysis: Tax Payable Under Both Regimes
Scenario 1: Deductions Below Rs 3.75 Lakh
| Regime | Salary (Rs.) | Deductions/Exemptions (Rs.) | Net Taxable Income (Rs.) | Total Tax Payable (Rs.) | Beneficial Regime |
|---|---|---|---|---|---|
| Old regime | 15,00,000 | 3,70,000 | 11,30,000 | 1,51,500 | New |
| New regime | 15,00,000 | 0 | 15,00,000 | 1,50,000 | |
| Old regime | 20,00,000 | 3,70,000 | 16,30,000 | 3,01,500 | New |
| New regime | 20,00,000 | 0 | 20,00,000 | 3,00,000 | |
| Old regime | 25,00,000 | 3,70,000 | 21,30,000 | 4,51,500 | New |
| New regime | 25,00,000 | 0 | 25,00,000 | 4,50,000 |
Scenario 2: Deductions of Rs 3.75 Lakh and Above
| Regime | Salary (Rs.) | Deductions/Exemptions (Rs.) | Net Taxable Income (Rs.) | Total Tax Payable (Rs.) | Beneficial Regime |
|---|---|---|---|---|---|
| Old regime | 15,00,000 | 3,80,000 | 11,20,000 | 1,48,500 | Old |
| New regime | 15,00,000 | 0 | 15,00,000 | 1,50,000 | |
| Old regime | 20,00,000 | 3,80,000 | 16,20,000 | 2,98,500 | Old |
| New regime | 20,00,000 | 0 | 20,00,000 | 3,00,000 | |
| Old regime | 25,00,000 | 3,80,000 | 21,20,000 | 4,48,500 | Old |
| New regime | 25,00,000 | 0 | 25,00,000 | 4,50,000 |
Key Takeaways
From the above tables, it is evident that:
- For taxpayers earning Rs 15 lakh or more, if the total eligible deductions and exemptions are Rs 3.75 lakh or less, the new tax regime is generally more beneficial.
- If the total deductions and exemptions exceed Rs 3.75 lakh, the old tax regime becomes more advantageous.
Conclusion
Taxpayers should carefully evaluate their eligible deductions and exemptions before deciding on the tax regime. As a thumb rule, those earning Rs 15 lakh and above should opt for the new tax regime if their deductions are less than Rs 3.75 lakh and the old regime if their deductions exceed Rs 3.75 lakh. This strategic decision can significantly impact the total tax payable, ensuring that taxpayers maximize their savings during the ITR filing season.