Okay, so last week, the Finance Minister announced the most awaited Union Budget. We all were expecting some relief from tax.
But we didn’t receive much relief. And last week was filled with confusion.
So, let’s discuss the fundamental changes in the tax slabs and rebates and check which tax regime would be suitable for you.
Estimated read time: 3 minutes and 6 seconds
Buckle up, here we go!
First, if you didn’t know, there were two tax regimes. All you need to know is that the Government introduced a new simplified tax regime with simple tax slabs shown in the picture below.
The Government gave us the option to choose between the new tax regime or the old tax regime. Both regimes had a tax rebate of ₹5 lakhs.
And only around 1% of taxpayers selected the new tax regime because the government didn’t allow us to claim tax exemptions and tax deductions in the new tax regime like we used to do in the old tax regime.
People are used to claiming exemptions and deductions to reduce their taxes. And they didn’t want to pay more taxes just to make their taxes simpler.
So this time around, the government updated the new tax regime.
They increased the tax rebate limit to ₹7 lakhs and added a standard deduction of ₹50k for salaried employees. They also tweaked the tax slabs in the new tax regime a bit to make it more lucrative.
They changed nothing in the old tax regime, or in the exemptions or deductions used in the old tax regime.
So, let’s compare the old and new (updated) tax regimes.
Now you can see how there are different tax slabs in both regimes. In the old tax regime, you don’t have to pay tax for income under ₹5 lakhs. And you can use all the tax exemptions and deductions.
In the new tax regime, you don’t have to pay tax for income under ₹7 lakhs. You can’t claim any tax exemptions or deductions, except the new standard deduction of ₹50k allowed for salaried individuals and employer’s contributions towards NPS.
So which regime should you choose? Which one would be more appropriate for you?
Well, it depends.
It depends on your financial investments, situation, etc. If you have a home loan, you can claim tax deductions and enjoy less tax under the old tax regime.
If you don’t have a home loan, you have to check whether, by just claiming tax deductions based on your investments in 80C and 80D, are you able to save more tax in the old tax regime?
Also, don’t forget about the tax exemptions. You can claim tax exemptions like house rent allowance (HRA), leave travel allowance (LTA), meal coupons, etc.
To make things more clearer. Just check the below table shared by bank bazaar. They assumed you will be able to claim 20% in tax deduction.
Source: Bank Bazaar
Now this table shows that in most cases, the new tax regime helps you to save more in taxes.
And the old tax regime can only help you save more tax if you can claim a tax exemption or deduction of over 20% of your income.
If you want to save more taxes, and you are in a position to make a tax exemption or deduction of over 20-30% of your income, you can opt for the old tax regime.
If you don’t have much cash flow to fully use tax deductions, then you can opt for the new tax regime.
Remember, this updated new tax regime is only applicable next year.
We understand that the government wants to make the taxes more simpler and consumption-based.
But the problem with not allowing individuals to claim tax deductions is, they won’t be encouraged to invest in PPF, ELSS or in insurance in the future.
Until now, most people invested in tax savings schemes and insurance just to save tax. They don’t have any other goal for those investments.
Also, don’t simply invest to save tax under the old tax regime.
Achieving your financial goals and securing your family’s future should be the reasons behind your investments, not the tax benefits. While doing this, if you save taxes, that’s great.
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