Tax planning is a crucial part of financial well-being, and with the new tax regime in place, many taxpayers wonder which option is best for them. Should you stick with the old regime, which offers deductions and exemptions, or opt for the new regime with lower tax rates and a simpler structure? This guide will help you compare both tax regimes and make an informed decision.
Understanding Income Tax Basics
When you receive your first salary, you may notice a deduction labeled Tax Deducted at Source (TDS). Paying income tax is essential, as it is one of the two primary sources of government revenue—Direct Taxes and Indirect Taxes. However, you can legally minimize taxes through exemptions and deductions.
Key Income Tax Terminologies
- Gross Income: Your total earnings before claiming any deductions or exemptions. It includes salary, interest, dividends, capital gains, and other sources of income.
- Heads of Income:
- Income from Salary
- Income from House Property
- Income from Business or Profession
- Income from Capital Gains
- Income from Other Sources (gifts, lottery, etc.)
- Tax Exemptions: Some types of income are not taxable and help reduce tax liability:
- Standard Deduction: Flat deduction of Rs 50,000 per year (Rs 75,000 under the new tax regime).
- House Rent Allowance (HRA): Exemption based on actual rent paid.
- Leave Travel Allowance (LTA): Available twice in a 4-year block.
- Children’s Education & Hostel Allowance.
- Tax Deductions: Certain investments and expenses reduce taxable income:
- Section 80C: Investments in ELSS, PPF, NSC, Home Loan Principal, Tuition Fees, Insurance, ULIP, Sukanya Samriddhi (Up to Rs 1,50,000).
- Section 80D: Medical Insurance (Self & Family) (Rs 25,000; Rs 50,000 for senior citizens).
- Section 80E: Interest on Education Loan (Deduction for 8 years).
- Section 80G: Donations (50%-100% deduction based on eligibility).
- Taxable Income: The amount left after deducting exemptions and deductions from your gross income.
- Tax Deducted at Source (TDS): Employers deduct TDS based on your estimated taxable income. If excess tax is deducted, you can claim a refund while filing your income tax return.
Old vs. New Tax Regime: A Comparative Analysis
The Budget 2020 introduced a new tax regime with lower tax rates but fewer deductions. Choosing between them depends on your tax-saving strategy.
Comparison of Tax Rates
| Annual Income | Old Tax Regime | New Tax Regime |
| Up to Rs 2.5 Lakhs | Nil | Nil |
| Rs 2.5 – 5 Lakhs | 5% | 5% |
| Rs 5 – 7.5 Lakhs | 20% | 10% |
| Rs 7.5 – 10 Lakhs | 20% | 15% |
| Rs 10 – 12.5 Lakhs | 30% | 20% |
| Rs 12.5 – 15 Lakhs | 30% | 25% |
| Above Rs 15 Lakhs | 30% | 30% |
Key Differences Between the Two Regimes
| Feature | Old Tax Regime | New Tax Regime |
| Tax Rates | Higher | Lower |
| Deductions & Exemptions | Available (HRA, 80C, etc.) | Limited (Only ₹75,000 standard deduction) |
| Simplicity | Requires tax planning | Straightforward |
| Who Benefits? | High earners using deductions | Individuals with fewer deductions |
Breakeven Analysis: Which Regime Saves You More Tax?
The breakeven point is where the tax liability under both regimes is the same. If your deductions exceed this threshold, the old regime is better; otherwise, the new regime is more beneficial.
When the Old Regime is Better:
- If you earn ₹13.75 lakh (without HRA) and invest ₹5.25 lakh in tax-saving schemes, your tax liability will be lower under the old regime.
- Even with HRA benefits, the old regime remains favorable for incomes up to ₹15.75 lakh.
When the New Regime is Better:
- If your income is ₹20 lakh (₹20.75 lakh for salaried individuals), the new tax regime results in lower taxes.
- For incomes above ₹24.75 lakh, the new regime is better if your total deductions (excluding the standard deduction) are under ₹8 lakh.
Which Tax Regime Should You Choose?
- If you actively invest in tax-saving instruments, the old tax regime allows you to maximize deductions.
- If you prefer a simple structure with lower rates, the new tax regime may be a better fit.
- Your choice should depend on your income level, deductions, and financial goals.
Tax Planning: Why Start Early?
- Ease financial strain: Investing throughout the year avoids last-minute rush.
- Avoid mis-selling: Last-minute investments often lead to poor financial decisions.
- Maximize tax benefits: Early planning helps you utilize all available deductions.
Use the Tax Calculator to Make an Informed Decision!
Still unsure which regime suits you best? Try our tax calculator to see exactly how much tax you will pay under each regime.
Proper tax planning helps you save money legally. Remember, minimize taxes but never evade them! Have questions? Comment below or reach out. For more financial insights, visit our website and YouTube channel!
