Old Vs New Income Tax Regime
Being an Indian taxpayer, it is vital for you to understand the various changes in the tax regime and how they will affect you directly. In the recent Union Budget, the Indian government introduced a new income-tax regime, which aims to simplify the tax system and provide taxpayers with more options. In this blog, we'll compare the old and new income-tax regimes and help you understand the difference between the two. But first, let us go over the basics of income tax to ensure that we’re all on the same page:
What is Income Tax?
The income of an individual or business is subject to income tax. The income can be from various sources such as salary, business, and investments. The Indian government collects income tax to fund various development programs and to provide essential services to citizens.
Why is Income Tax Important?
Income tax is one of the most important sources of revenue for the government. The funds collected through income tax are used to develop infrastructure, provide healthcare and education services, and build a better future for the country. Income tax is also important for individuals as it helps them plan their finances and saves them from any legal penalties. The ability to establish a solid credit history and keep a spotless record with the government is enhanced by timely filing of income tax returns and payment of income taxes.
What are the Tax Slabs?
The Indian government has set different tax slabs for different income ranges. The tax slab for an individual depends on the person's age and the amount of taxable income. This makes the tax more affordable for people of various income groups and thereby reducing the load of taxation on people who cannot afford it.
New Vs. Old Tax Regime
Now that we’ve covered all the basics let’s go over the differences between the new and old tax regimes:
Old Income-Tax Regime
Under the old income-tax regime, taxpayers are required to pay taxes on their taxable income after deducting eligible exemptions and deductions. The exemptions and deductions that were available under the old regime included investments in tax-saving instruments like Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity Linked Saving Schemes (ELSS). One of the biggest drawbacks of the old regime was that taxpayers were required to pay a higher tax rate on their taxable income if they claimed these exemptions and deductions. This resulted in taxpayers having to make a trade-off between saving taxes and availing exemptions and deductions.
New Income-Tax Regime
Under the new income-tax regime, taxpayers have the option to select between the old and new regimes. The new regime offers lower tax rates for taxpayers who are willing to forego some of the exemptions and deductions that were available under the old regime. In the new regime, taxpayers can enjoy lower tax rates of 10%, 15%, 20%, and 25% on their taxable income. However, in order to avail of these lower tax rates, taxpayers must give up some of the exemptions and deductions that were available under the old regime. Some of the exemptions and deductions that have been removed under the new regime include deductions for investments in tax-saving instruments like PPF, NSC, and ELSS.
Advantages of the New Income-Tax Regime
Let’s go over some of the advantages of the new income tax regime:
Lower Tax Rates
The biggest advantage of the new income-tax regime is the lower tax rates that are available to taxpayers. This means that taxpayers can save on their tax liabilities, provided they are willing to forego some of the exemptions and deductions that were available under the old regime.
Simplified Tax System
Another advantage of the new income-tax regime is that it simplifies the tax system. With lower tax rates and fewer exemptions and deductions, the tax system becomes less complicated and easier for taxpayers to understand.
More Options
The new income-tax regime also gives taxpayers more options when it comes to paying taxes. Taxpayers can choose between the old and new regimes, depending on their personal preferences and tax liabilities.
Disadvantages of the New Income-Tax Regime
Now that we’re through the advantages, let’s understand some of its cons to ensure we make the right decision.
Foregoing Exemptions and Deductions
The biggest disadvantage of the new income-tax regime is that taxpayers must give up some of the exemptions and deductions that were available under the old regime. This can result in higher tax liabilities for some taxpayers, especially those who had been availing a large number of exemptions and deductions.
Complex Calculations
The new income-tax regime can also be more complex for taxpayers, as they must calculate their taxable income after taking into account the exemptions and deductions that they have given up.
Making the Right Choice
When it comes to choosing between the old and new income-tax regimes, there is no one-size-fits-all answer. Taxpayers must take into account their personal preferences, tax liabilities, and financial goals before making a decision. If you're someone who is looking to save on your tax liabilities, the new income-tax regime may be the right choice for you.
Final Thoughts
Now that you know about the difference between both tax regimes, it should be much easier to complete your tax filings. If you’d like to learn more about tax regimes or how they impact you as a citizen, feel free to get in touch with our team at Lawgical India. We’d be glad to help resolve any queries and our teams of taxation and legal experts are always ready to assist you.
