The time for filing Income Tax Returns (ITR) is approaching and the biggest question before the employed people is whether to choose the old tax regime or the new tax regime. The new tax regime has now become the default option and has lower tax rates. At the same time, in the old tax regime, many tax exemptions and deductions like HRA, 80C, 80D and NPS are available. In such a situation, for employees earning Rs 15 lakh, 20 lakh or Rs 25 lakh annually, the right choice can have a big impact on their tax savings.
According to Akhil Chandana, partner, Grant Thornton Bharat, which tax regime is better depends on how many tax exemptions and deductions you can claim.
How did the two tax regimes compare?
For comparison, some common deductions in the old tax regime have been considered. These include standard deduction of Rs 50,000, investment of Rs 1.5 lakh under Section 80C, deduction of Rs 50,000 on additional NPS investment, health insurance of Rs 25,000 under Section 80D and HRA exemption of up to Rs 2 lakh. That means a total tax exemption of Rs 4.75 lakh has been taken as the basis.
At the same time, only standard deduction of Rs 75,000 has been included in the new tax regime. Most of the deductions like 80C, 80D, HRA and 80CCD(1B) are not available in this. However, the contribution made by the employer to NPS continues to be exempted up to the prescribed limit.
How much tax on salary of Rs 15, 20 and 25 lakh?
If the annual salary of an employee is Rs 15 lakh, then in the old tax regime he will have to pay tax of around Rs 1,24,800, whereas in the new tax regime this amount reduces to Rs 97,500. That means there is a saving of around Rs 27,300.
On an annual income of Rs 20 lakh, the tax in the old tax regime is around Rs 2,80,800, whereas in the new tax regime it comes to Rs 1,92,400. That means there is a saving of Rs 88,400.
Similarly, an employee with a salary of Rs 25 lakh will have to pay tax of around Rs 4,36,800 in the old tax regime, whereas in the new tax regime it will be Rs 3,19,800. In this situation, tax of about Rs 1.17 lakh can be saved.
The calculation will not be the same for every person
However, this comparison is only an example. The actual tax will depend on your salary structure, HRA, home loan, medical insurance, NPS investments and other tax exemptions. If your HRA exemption exceeds Rs 2 lakh or you claim home loan interest and other deductions, your tax calculation may be different.
When will the old tax regime remain beneficial?
According to experts, for those who live in a rented house and avail substantial HRA exemption, invest the entire Rs 1.5 lakh under Section 80C, deposit an additional Rs 50,000 in NPS, pay health insurance premium and claim exemption on home loan interest, the old tax regime may prove to be better for them.
Neeraj Aggarwal, senior partner, Nangia & Co LLP, says that for a person with an annual income of Rs 15 lakh, the old tax regime can be more beneficial if he can claim a total tax exemption of around Rs 5.5 lakh or more. Therefore, before filing ITR, it would be wisest to calculate your tax in both the tax regimes and compare them.
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