Summary of this article
Under the Old Tax Regime, taxpayers can claim deductions for investments under Section 80C, medical insurance premiums under Section 80D, interest on savings accounts, eligible donations, HRA, home loan interest and certain other tax benefits.
The New Tax Regime works differently. It offers lower tax rates but does away with most deductions and exemptions.
The right approach is to compare the tax liability under both regimes every year and then choose the one that offers the maximum tax savings.
A majority of taxpayers with an income of more than Rs 15 lakh assume that the Old Tax Regime automatically translates into saving higher taxes since it allows various deductions and exemptions under the income tax law. However, that may not always be true. The better option for you has less to do with your income and more with the exemptions and deductions you can actually claim.
Under the Old Tax Regime, taxpayers can claim deductions for investments under Section 80C, medical insurance premiums under Section 80D, interest on savings accounts, eligible donations, House Rent Allowance (HRA), home loan interest and certain other tax benefits. These deductions reduce the taxable income, which in turn lowers the tax liability.
“The New Tax Regime works differently. It offers lower tax rates but does away with most deductions and exemptions. While you cannot claim most deductions under the New Tax Regime, many salaried employees do not have enough deductions to make the Old Tax Regime more beneficial. For such taxpayers, the New Tax Regime often results in a lower tax liability along with a much simpler return filing process,” says Harsh Rustagi, Consultant, Nangia & Co LLP.
Consider the example of a salaried employee earning Rs 20 lakh in a financial year. Assume the employee claims only the commonly available deductions, such as Section 80C, Section 80D, Section 80G, Section 80TTA and a modest HRA exemption. Even after claiming these deductions, the New Tax Regime may still result in a lower tax liability because of its concessional tax rates.
The comparison below illustrates this.
However, the outcome can change significantly if a taxpayer is eligible for higher deductions. “For instance, someone paying substantial rent in a metro city may be entitled to a higher HRA exemption. Likewise, taxpayers claiming deduction for interest on a self-occupied home loan, additional contributions to the National Pension System (NPS), education loan interest or other eligible deductions may find that the Old Tax Regime offers greater tax savings,” says Rustagi.
The example below highlights this scenario.
These examples show that salary alone should not determine the choice of tax regime. Instead, taxpayers should first prepare a list of all the deductions and exemptions they are eligible to claim and then compare the tax payable under both regimes. Most tax filing utilities and online tax calculators now make this comparison simple and quick.
Apart from the tax savings, convenience is another factor worth considering. The New Tax Regime requires far less documentation because most deductions and exemptions are not available. Taxpayers do not have to maintain investment proofs, rent receipts, donation receipts or several other documents that are otherwise required under the Old Tax Regime. This makes compliance simpler and reduces the chances of errors while filing the income tax return.
The bottom line is that there is no universal answer for taxpayers earning more than Rs 15 lakh. “While the New Tax Regime is likely to benefit salaried individuals with limited deductions, those with significant tax-saving investments, home loan benefits or HRA exemptions may still find the Old Tax Regime more rewarding. The right approach is to compare the tax liability under both regimes every year and then choose the one that offers the maximum tax savings,” suggests Rustagi.
