Old vs. new income tax regime: Deciding between the old and new tax regimes isn’t a one-size-fits-all situation—it depends entirely on your unique financial profile, including your income, investment habits, and eligible deductions. To help you make an informed decision, here’s a clear comparison of both regimes, outlining their key benefits and when each might be the better choice for you.
New Tax Regime
Why choose it?
Lower Tax Rates: Generally offers lower tax rates across various income slabs.
Simplified Structure: Fewer exemptions and deductions, making tax filing simpler and potentially reducing paperwork.
Higher Basic Exemption: The basic exemption limit is ₹4,00,000 (₹3,00,000 until FY 2024-25).
Increased Standard Deduction: Salaried individuals can claim a standard deduction of ₹75,000 (increased from ₹50,000 in FY 2024-25). This effectively makes income up to ₹12.75 lakh tax-free for them.
Higher Tax Rebate: A full tax rebate is available for those with an income of up to ₹7,00,000.
Reduced Surcharge for High Earners: The highest surcharge rate is capped at 25% for income exceeding ₹5 crore, potentially lowering the effective tax rate for high-net-worth individuals.
Flexibility for Young Earners: Beneficial for young professionals or those who haven’t made significant investments.
Increased Monthly Cash Flow: As you are not required to invest in specific tax-saving schemes, you have more disposable income.
Old Tax Regime
Why choose it?
Deductions and Exemptions: Allows you to claim a wide range of deductions and exemptions, such as:
Section 80C: Investments in PPF, EPF, ELSS, life insurance premiums, home loan principal repayment (up to ₹1.5 lakh).
Section 80D: Health insurance premiums.
Section 24(b): Interest paid on a home loan (up to ₹2 lakh for self-occupied property).
House Rent Allowance (HRA): Exemption for rent paid.
Leave Travel Allowance (LTA): Exemption for travel expenses.
Section 80E: Interest paid on education loans.
Section 80G: Donations to specified charitable institutions.
Encourages Savings: The tax benefits associated with certain investments encourage saving habits.
Higher Exemption for Senior Citizens: Offers a higher basic exemption limit for senior citizens (₹3,00,000) and super senior citizens (₹5,00,000).
Old vs. new income tax regime: Which should you choose?
Calculate Your Tax Liability Under Both Regimes: Use an online tax calculator or consult a financial advisor to estimate your tax under both regimes based on your income, investments, and eligible deductions.
Consider Your Income Level:
Lower Income (up to ₹7 lakh): The new regime might be beneficial due to the higher tax rebate, potentially resulting in zero tax liability.
Middle Income (₹7 lakh – ₹15 lakh): Compare the tax liability under both regimes after considering your potential deductions. If your deductions are significant, the old regime might be better. If you have fewer deductions, the new regime’s lower rates could be more advantageous.
Evaluate Your Investments and Deductions:
If you make significant tax-saving investments (under Section 80C, etc.), pay substantial rent, or have a home loan with significant interest, the old regime is likely to be more beneficial.
If you prefer not to make many tax-related investments or have fewer eligible deductions, the new regime’s simplicity and lower rates might be more attractive.
You need to inform your employer at the beginning of the financial year about your preferred income tax regime for TDS (Tax Deducted at Source) purposes. If you don’t, the new regime will be the default. You can change your chosen regime when filing your tax return at the end of the financial year.
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