Individuals who do not need to verify their income accounts must file an income tax return or ITR for tax year 2022-23 by July 31, 2022. Currently, there are two income tax regimes available to taxpayers – the old income tax regime, the new or a concessional income tax regime. Before you file your tax return this year, let’s take a detailed look at the tax regimes
Old tax regime:
There are over 70 exemptions and deductions available under the old tax system to reduce the tax burden on individuals. To invest or spend in specific financial instruments, taxpayers can claim deductions.
For example, Section 80C of the Income Tax Act 1961 helps taxpayers to save up to Rs 1.5 lakh per annum for various investments. To receive the benefits, individuals must invest the amount in qualifying schemes or spend the money on the specified deductible within the same fiscal year. Investments include Employees Provident Fund (EPF), Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Pension Scheme (NPS), Insurance Scheme Unity Linked (ULIP), Sukanya Samriddhi Yojana (SSY), National Attestation Savings Scheme (NSC) and 5-year tax deductible fixed rate term deposits with a bank and/or ‘a post office.
Taxpayers can also opt for a deduction of up to Rs 25,000 for insurance premiums. If the insured is over 60, the deduction can increase up to Rs 50,000.
An employee can claim exemptions on elements of their salary such as Rent Allowance (HRA) and Travel Leave Allowance (LTA). A lump sum deduction of Rs 50,000 will also be available under the old tax regime.
New tax regime:
The concessional tax system, which was introduced in the 2020 budget, has more tax brackets and lower tax rates compared to the old system. Also, the exemptions and deductions of the old tax system have been abolished.
Under the new tax regime, annual income between Rs 5 lakh and Rs 7.5 lakh will be taxed at 10%, while income ranging from Rs 7.5 lakh to Rs 10 lakh per annum will be subject to tax. by 15%. Under the old regime, those with an income between Rs 7 lakh and Rs 10 lakh fell under a flat tax bracket of 20%.
Similarly, income above Rs 10 lakh is divided into three brackets under the new tax regime – 20% tax for income between Rs 10 lakh and Rs 12.5 lakh; 25% for income between Rs 12.5 lakh and Rs 15 lakh; and 30% tax on income of Rs 15 lakh and above.
List of some of the exemptions and deductions that will not be available under the new tax regime:
1) Leave Travel Allowance or LTA;
2) Housing allowance or HRA;
3) Standard deduction of Rs 50,000 currently available to all employees and pensioners;
4) Special Deduction Allowance under Rule 2BB (such as Child Raising Allowance, Housing Allowance, Transportation Allowance, Daily Allowance, Uniform Allowance, etc. );
5) Allowance for bludgeoning the minor’s income;
6) SEZ exemption under Article 10 AA;
7) Deduction for entertainment allowance and business tax provided for in Article 16;
8) Tax benefit on interest paid on a home loan taken out for an unoccupied or vacant home property that resulted in a loss of home ownership under Section 24;
9) Miscellaneous deductions under Sections 32AD, 33AB and 33ABA;
10) Deductions for donations or expenses for scientific research under Article 35;
11) Deduction under Section 35AD or 35CCC;
12) Deduction of Rs 15,000 authorized from family pension under clause (iia) of Article 57;
13) Tax deduction claimed under Chapter VI-A (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 should be mentioned that the deduction under subsection (2) of section 80CCD (employer’s contribution on behalf of employee in notified pension scheme – mainly NPS) and section 80JJAA ( for a new job) can still be claimed;
14) Deductions under Section 80TTA or 80 TTB
Who can opt for the old tax regime and the new tax regime?
Employees and pensioners can choose between the old tax regime and the new preferential tax regime each tax year according to their convenience. However, taxpayers with business or professional income do not have the option of choosing between the two tax regimes each year. These taxpayers will have only one option to switch between the two regimes.
What to choose: old tax regime or new tax regime?
Explaining the rationale for the new tax regime, Aarti Raote, Partner at Deloitte, said: “The new tax regime has been introduced to reduce taxes for taxpayers while denying certain exemptions or deductions such as HRA, LTA, standard deduction , 80C advantage, etc. Thus, the new tax system would be beneficial for the taxpayer who does not have such deductions to claim on total income so that he benefits from a lower tax incidence.
It is important to calculate the tax burden before choosing a tax regime. “When approaching tax planning, you have to check how much tax you have already saved. In the normal course, we do a lot of things and these have implications for tax savings. For example, we pay school fees for the kids, provide health and life insurance, get regular health checkups, and there may be a home loan.All of these activities save us taxes without knowing it.After that , we can get an idea of how much tax savings is left unused,” suggested Sujit Bangar, founder of Taxbuddy.com.
Taxpayers must calculate taxes under both regimes and find for each tax year what works best for them to make the most of this benefit.
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