As an Indian citizen, paying taxes is an important part of your financial responsibilities. However, it can often be a daunting task to keep up with the various tax laws and regulations that change from year to year. In recent years, the government of India has introduced a new tax regime that offers a simpler tax structure and lower tax rates. In this blog post, we will compare the new and old tax regimes and help you understand which one might be the best option for you.
Old Tax Regime
Under the old tax regime, taxpayers were required to pay tax at different rates based on their income levels. The tax slabs were as follows:
- For income up to Rs. 2.5 lakh, no tax was payable.
- For income between Rs. 2.5 lakh and Rs. 5 lakh, the tax rate was 5%.
- For income between Rs. 5 lakh and Rs. 10 lakh, the tax rate was 20%.
- For income above Rs. 10 lakh, the tax rate was 30%.
In addition to this, taxpayers were allowed to claim deductions under various sections of the Income Tax Act, such as Section 80C, which allowed a deduction of up to Rs. 1.5 lakh for investments in certain instruments like Provident Fund, Public Provident Fund, Equity Linked Savings Schemes (ELSS), etc. Other deductions such as medical insurance premium, interest on housing loan, education loan, etc. were also allowed.
New Tax Regime
The new tax regime was introduced in the Union Budget of 2020 and offers a simpler tax structure with lower tax rates. The new tax regime comes with lower tax rates, but the taxpayer is not allowed to claim deductions under various sections of the Income Tax Act. The tax slabs under the new regime are as follows:
- For income up to Rs. 2.5 lakh, no tax is payable.
- For income between Rs. 2.5 lakh and Rs. 5 lakh, the tax rate is 5%.
- For income between Rs. 5 lakh and Rs. 7.5 lakh, the tax rate is 10%.
- For income between Rs. 7.5 lakh and Rs. 10 lakh, the tax rate is 15%.
- For income between Rs. 10 lakh and Rs. 12.5 lakh, the tax rate is 20%.
- For income between Rs. 12.5 lakh and Rs. 15 lakh, the tax rate is 25%.
- For income above Rs. 15 lakh, the tax rate is 30%.
It is important to note that taxpayers who opt for the new tax regime cannot claim deductions under various sections of the Income Tax Act. This means that they cannot claim deductions for investments in instruments like Provident Fund, Public Provident Fund, Equity Linked Savings Schemes (ELSS), etc. Other deductions such as medical insurance premium, interest on housing loan, education loan, etc. are also not allowed under the new tax regime.
Comparison between Old and New Tax Regimes
The new tax regime offers lower tax rates compared to the old tax regime. This means that taxpayers under the new regime will have to pay less tax compared to the old regime, provided they do not have significant deductions under various sections of the Income Tax Act.
However, taxpayers who have significant deductions under various sections of the Income Tax Act may find that they are better off under the old tax regime. For example, if a taxpayer has investments in Provident Fund, Public Provident Fund, and ELSS that amount to Rs. 1.5 lakh, they can claim a deduction