Which tax slab to choose and why

Which tax slab to choose and why?

Every year, the Finance Act brings many changes and is awaited by many taxpayers in the country. The changes in the 2020 budget have brought changes in the tax slabs and lower rates applicable to income earned. This has been demanded by the taxpayers for a very long time. The lower tax slabs have provided much-demanded relief to the taxpayers, but there is an obvious side effect of it. The new system has deprived taxpayers of the exemptions and deductions available under the older taxation system. Income tax calculators have made the process of calculating tax simpler than ever before.

If you are in a dilemma regarding which tax slab to choose and why. Read on to know more and compare both the new and existing systems of taxation.

Let us consider the two tax slabs- Old and New Tax Regimes.

Slab Old Tax Regime + 4% Cess New Tax Regime + 4% Cess
0 to Rs. 2.5 lakhs Exempt Exempt
Rs 2.5 to Rs 5 lakhs 5% 5%
Rs 5 to 7.5 lakhs 20% 10%
Rs 7.5 to Rs 10 lakhs 20% 15%
Rs 10 to 12.5 lakhs 30% 20%
Rs 12.5 to 15 lakhs 30% 25%
Rs 15 lakhs + 30% 30%

Income tax calculators assist in selecting the right slab depending on your profile. The example given below explains the difference in the total tax liability of an individual with the existing and new system of tax and the same income.

If we consider Rs 8,00,000 of total annualised income as per the new and the old tax regimes. Under the Old Tax Regime, you would be eligible for a tax exemption for standard deduction up to Rs 50,000 per annum, HRA (house rent allowance) and investments done in 80C up to Rs 1,50,000 per annum, and under section 80D up to Rs 25,000 per annum for a premium paid for health insurance of self, spouse and dependent children.

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However, under the New Tax Regime, although the applicable tax slabs are lower, there are no tax deductions or exemptions that are applicable.

Old Tax Regime New Tax Regime
Gross Salary Rs. 8,00,000 Rs. 8,00,000
Less standard deduction Rs 50,000 NIL
Less: HRA Rs 1,40,000 NIL
Less: 80C investment Rs 1,00,000 NIL
Less: 80D investment Rs 25,000 NIL
Net Taxable Income Rs 8,00,000 – (50,000 + 1,40,000 + 1,00,000 + 25,000)
= 5,37,000
Rs 8,00,000
Total Tax Payable = 5% of 2,50,000 + 20% of 37,000 + 4% Cess
= 12,500 + 7,400 + 796
= Rs 20,696
= 5% of 2,50,000 + 10% of 2,50,000 + 15% of 3,00,000
= 12,500 + 25,000 + 7500 + 1800
= Rs 46,800

The question of which tax slab to choose still pertains. This unfortunately does not have a single solution to it. The intricate provisions under the Indian tax system make it difficult for a person to choose which is the best pick.

Having a planned and structured approach to this question can help you identify the better pick.

  1. Calculating all the exemptions that you are availing of under the old system of tax will give you an insight into the amount that is taxable according to it.
  2. Computing all the deductions that are availed, especially as an employee, and the major deductions being EPF (employee provident fund), and the standard deduction will be extinguished if you choose the new taxation system.
  3. If you combine both the exceptions and deductions and calculate the taxable income as per the old system and then calculate the taxable income after foregoing both under the new tax system, it becomes the deciding factor that you can rely upon.
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Conclusion

As we discussed in the beginning, there is no simple answer to this question, as the complexity has magnified after the introduction of the new tax system. The new tax system has seen a paradigm shift when it comes to investment decisions. As a salaried individual, you can choose between the two systems every year, but individuals with business income have the facility to switch only once. The ease of numeric calculation is possible due to income tax calculators.

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