Individuals who are not required to audit their income accounts must file an income tax return or ITR for assessment year 2022-23 by July 31, 2022. or a favorable income tax scheme. Before filing income tax returns this year, let’s take a closer look at the tax regimes
Old tax system:
More than 70 exemptions and deductions are available under the old tax regime to reduce the tax burden on individuals. Taxpayers can claim deductions for investments or expenditure on specific financial instruments.
For example, Section 80C of Income Tax Act, 1961 helps the taxpayers to save up to Rs 1.5 lakh per year for various investments. To take advantage of the benefits, individuals must invest the amount in eligible schemes or spend the money on the specified deductible in the same fiscal year. Investments include Employees’ Provident Fund (EPF), Public Provident Fund (PPF), Equity Linked Saving Scheme (ELSS), National Pension Scheme (NPS), Unit Linked Insurance Plan (ULIP), Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC), and five-year tax-saving fixed deposits at a bank and/or post office.
Taxpayers can also opt for a deduction of up to Rs 25,000 for insurance premiums. If the insured is over 60 years of age, the deduction can be up to Rs 50,000.
Employees in paid employment can claim exemptions on parts of their salary, such as housing rent allowance (HRA) and leave travel allowance (LTA). A standard deduction of Rs 50,000 will also be available under the old tax regime.
New tax system:
The favorable tax regime, introduced in Budget 2020, has more tax brackets and lower tax rates compared to the old system. The exemptions and deductions from the old tax regime have also been deleted.
Income tax brackets under old income tax regime vs new income tax regime:
| Tax plate (in Rs) | Old tax rates (percent) | New Tax rates (percent) |
| 0 – 2.50.000 | 0 | 0 |
| 2.50.000 – 5.00.000 | 5 | 5 |
| 5,000,000 – 7,50,000 | 20 | 10 |
| 7.50,000 – 10,000,000 | 20 | 15 |
| 10,000,000 – 12,50,000 | 30 | 20 |
| 12.50,000 – 15.00,000 | 30 | 25 |
| 15,000,000 and above | 30 | 30 |
Under the new tax regime, the annual income between Rs 5 lakh and Rs 7.5 lakh will be taxed at 10 percent while the income ranging from Rs 7.5 lakh to Rs 10 lakh per year will be taxed at 15 percent. Under the old regime, those with incomes between Rs 7 lakh and Rs 10 lakh were subject to a fixed tax bracket of 20 percent.
Likewise, income above Rs 10 lakh is divided into three plates under the new tax system: 20 percent tax for income between Rs 10 lakh and Rs 12.5 lakh; 25 percent for income between Rs 12.5 lakh and Rs 15 lakh; and 30 percent tax on income of Rs 15 lakh and above.
List of some exemptions and deductions that will not be available under the new tax system:
1) Travel allowance or MJA leave;
2) Rent allowance or HRA;
3) Standard deduction of Rs 50,000 currently available to all salaried workers and retirees;
4) Special deduction allowance under Rule 2BB (such as children’s school allowance, hostel allowance, transport allowance, per diem allowance, uniform allowance, etc.);
5) Compensation for assuming income of a minor;
6) Exemption from SEZ under Article 10 AA;
7) Deduction for entertainment allowance and professional tax under Article 16;
8) Tax benefit on interest paid on a home loan taken out for an owner-occupied or vacant home that has resulted in a loss from owner-occupied home pursuant to Section 24;
9) Miscellaneous deductions under Sections 32AD, 33AB and 33ABA;
10) Deductions for donation or expenditure for scientific research pursuant to Article 35;
11) Deduction under Section 35AD or 35CCC;
12) Deduction of Rs 15,000 allowed on family pension under Clause (iia) of Article 57;
13) Tax deductions claimed under Chapter VI-A (such as Section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.)
It is worth noting that a claim can still be made for deduction under the second paragraph of Article 80CCD (employer’s contribution due to employee in a registered pension scheme – usually NPS) and Article 80JJAA (for new employment);
14) Deductions under Section 80TTA or 80 TTB
Who can opt for the old tax system and the new tax system?
In each tax year, employees and pensioners can choose at their own discretion between the old tax regime and the new favorable tax regime. However, taxpayers with a business or professional income do not have the freedom to choose between the two tax regimes in every financial year. Such taxpayers will have only one opportunity to switch between the two regimes.
What should you choose: old tax system or new tax system?
Aarti Raote, partner at Deloitte explains the rationale behind the new tax regime: “The new tax regime was introduced to provide lower taxes to taxpayers while denying certain exemptions or deductions such as HRA, LTA, standard deduction, 80C. Thus, the new tax system would beneficial to the taxpayer who cannot claim such deductions from total income, so that he would enjoy the benefit of a lower tax burden.”
It is important to calculate the tax burden before choosing a tax regime. “As you approach tax planning, consider how much tax you have already saved. In the normal course of business we do a lot of things and they have tax savings. For example, we pay kids’ tuition, have health and life insurance, have regular health checks, and may have a mortgage. All these activities unconsciously save us tax. After that, we can have an idea of how much part of the tax savings bracket remains untapped,” suggests Sujit Bangar, founder of Taxbuddy.com.
Taxpayers must calculate taxes under both regimes and figure out for each tax year what works best for them to take the best advantage of this benefit.
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