The time for filing Income Tax Return (ITR) is going on. In such a situation, the biggest question before the employed people is whether to choose the old tax system or the new tax system. The new tax system is now the default option and has lower tax slabs, whereas the old system provided benefits of various tax exemptions and deductions. In such a situation, choosing the right option can have a big impact on your tax savings. If your annual salary is ₹ 15 lakh, ₹ 20 lakh or ₹ 25 lakh, then how much tax will you have to pay in both the tax systems and in which one will you save more? Let us understand.
Comparison made on the basis of these deductions
According to Akhil Chandana, partner, Grant Thornton India, some common deductions and exemptions have been included in the calculations of the old tax system. This includes standard deduction of ₹50,000, investment of ₹1.50 lakh under section 80C, additional ₹50,000 in NPS (section 80CCD(1B)), ₹25,000 on health insurance (section 80D) and HRA of ₹2 lakh. That means a total tax exemption of ₹ 4.75 lakh has been considered. At the same time, only standard deduction of ₹ 75,000 has been included in the new tax system. Most of the exemptions like 80C, 80D, HRA and 80CCD(1B) are not available in this.
How much tax on salary of ₹15 lakh, ₹20 lakh and ₹25 lakh?
If the annual salary of an employee is ₹ 15 lakh, then in the old tax system he would have to pay tax of approximately ₹ 1,24,800. At the same time, in the new tax system the tax will reduce to ₹ 97,500. That means there will be a saving of around ₹27,300. If the annual salary is ₹ 20 lakh, then the tax in the old system will be ₹ 2,80,800 while in the new system it will be ₹ 1,92,400. This will save around ₹ 88,400. Similarly, an employee earning ₹ 25 lakh annually will have to pay tax of ₹ 4,36,800 in the old system, whereas in the new system it will reduce to ₹ 3,19,800. This means tax savings of up to ₹ 1.17 lakh can be achieved.
Is the new tax system better for everyone?
Based on these figures, the new tax system appears to have lower taxes in all three income groups. However, this does not mean that this will be the best option for every person. Experts say that your actual tax will depend on your salary structure, HRA, home loan, NPS, 80C investment, health insurance and other tax benefits from the company. Therefore, one should not decide just by looking at the tax slab.
For whom will the old tax system be beneficial?
If you live in a rented house and claim a good HRA, invest ₹1.50 lakh under 80C, deposit an additional ₹50,000 in NPS, pay health insurance premium and avail deduction of up to ₹2 lakh on home loan interest, then the old tax system may be more beneficial for you.
According to Neeraj Aggarwal, senior partner, Nangia & Company LLP, for a person with an annual income of ₹ 15 lakh, the old tax system will be better than the new system only if he can claim total tax exemptions and deductions of about ₹ 5.5 lakh or more. As income increases, more deductions are required to make the old tax system profitable.
Do this work before filing ITR
Experts advise that before filing ITR, calculate your tax separately in both the tax systems. If you do not have many deductions and exemptions to save tax, then the new tax system may be a better option. At the same time, people who have the benefit of HRA, home loan, NPS and other tax saving investments can save more by choosing the old tax system. Choosing the tax system only after proper comparison will be the wisest decision.
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