When it comes to income tax return (ITR) filing, there has always been confusion among taxpayers about which option to choose – the old tax regime or the new tax regime. If your annual salary is above Rs 15 lakh, you might be wondering which regime will suit you better and help you save more tax.
The new tax regime offers lower tax rates but does not allow most exemptions and deductions. The old tax regime, on the other hand, permits taxpayers to reduce their taxable income through deductions such as Section 80C investments, health insurance premiums, and home loan benefits.
New tax regime
Under the new tax regime, income is taxed in smaller slabs. This means you do not pay a tax on your entire income but different portions of your income are taxed at different rates.
One of the biggest advantages of the new tax regime is the rebate available under Section 87A of the Income Tax Act. Because of this rebate, there is no income tax up to Rs 12 lakh.
For example, if your taxable income is Rs 15 lakh:
- Income up to Rs 4 lakh: No tax
- Rs 4 lakh to Rs 8 lakh: Taxed at 5%
- Rs 8 lakh to Rs 12 lakh: Taxed at 10%
- Rs 12 lakh to Rs 15 lakh: Taxed at 15%
Old tax regime
Under the old tax regime, the tax slabs are fewer and the rates rise more sharply.
For a taxable income of Rs 15 lakh:
- Income up to Rs 2.5 lakh: No tax
- Rs 2.5 lakh to Rs 5 lakh: Taxed at 5%
- Rs 5 lakh to Rs 10 lakh: Taxed at 20%
- Income above Rs 10 lakh: Taxed at 30%
Which regime is better if your salary is Rs 15 lakh
For example, Anamika earns:
- Salary income: Rs 15 lakh
- Savings account interest: Rs 7,000
- Freelancing income: Rs 50,000
- Home loan interest paid: Rs 1.5 lakh
Under the old tax regime:
- Salary: Rs 15 lakh
- Less standard deduction: Rs 50,000
- Taxable salary: Rs 14.5 lakh
Add:
- Freelancing income: Rs 50,000
- Savings account interest: Rs 7,000
- Gross Total Income = Rs 15.07 lakh
She can claim a home loan interest deduction Rs 1.5 lakh, and savings account interest deduction under Section 80TTA is Rs 7,000. Total deductions is Rs 1.57 lakh. After deductions, the taxable income is Rs 13.5 lakh. Based on the old regime tax slabs, her final tax liability, including 4% cess, comes to Rs 2,26,200.
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Under the new tax regime:
- Salary: Rs 15 lakh
- Less standard deduction: Rs 75,000
- Taxable salary: Rs 14.25 lakh
Add:
- Freelancing income: Rs 50,000
- Savings account interest: Rs 7,000
- Taxable Income = Rs 14.82 lakh
- Her total tax liability is Rs 1,06,392
Unlike the old regime, Anamika cannot claim a home loan interest deduction and a section 80TTA deduction on savings account interest. Despite having a higher taxable income under the new regime, Anamika pays about Rs 1.2 lakh less tax because of the lower tax rates.