Finance Minister Nirmala Sitharaman introduced a new tax regime in the Union budget 2020 that offers lower tax rates for individuals who forego most of their exemptions and deductions. This new regime received mixed reactions from taxpayers. While some welcomed the lower tax rates, others preferred the old regime with its various exemptions and deductions.
In this blog, we will explore the advantages and disadvantages of the new tax regime as well as the old tax regime. We hope this blog helps you pick the right tax regime for your income and preferences.
Under the new tax regime, tax rates have been rationalised into five tax slabs ranging from 0% to 30%. The total tax you pay after or without deductions from your annual income, health insurance, etc., also differs based on your source of income. As a salaried individual who uses all their deductions, you may benefit from the new regime slab. Senior citizens, on the other hand, may opt for the new regime. The tax exemption limit also depends on your income slab, and you should choose your preferred regime based on your individual tax calculation.
Choosing between the old and new tax regimes completely depends on your preference. The old regime offers more exemptions and deductions, allowing for greater tax planning and savings. However, it has a complex structure and limited flexibility. The new regime provides lower tax rates and a simpler structure but has fewer exemptions and limited tax planning opportunities. Individuals should carefully assess their income, deductions, and tax liabilities to determine which regime is more beneficial for them. Consulting with a tax professional can help make an informed decision based on individual tax calculations.
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The new tax regime has five tax slab rates from 0% to 30%, with a basic exemption limit of ₹3 lakh. It has a maximum tax rate of 30% for income over ₹15 lakh. There's also a tax rebate on income up to ₹7 lakh under section 87A.
For high-income individuals, the tax liability will mainly differ based on whether they can claim any exemptions and deductions or not, as the tax rate is the same. If your deductions exceed ₹4 lakhs, the old tax regime might be beneficial for you. However, if your deductions are lower than that, you might save more with the new regime.
The new tax regime has lower tax rates but fewer deductions and exemptions compared to the old tax regime. The old tax regime has more deductions and exemptions but higher tax rates. Calculate income tax liabilities for yourself using an income tax calculator and talk to a professional before choosing a regime. Here is another blog that walks you through the differences in detail.
For a person earning less than ₹6 LPA, the new regime is better as the tax rate is lower compared to the old tax regime.