Does the new option of lower tax rates work for you?

There is lots of confusion about new tax regime. People are not able to decide which one to opt for. Let us discuss the new tax regime.

Basics of scheme

The new tax regime is available only to Individuals as well as to an HUF whether you are a resident or a non-resident and is optional. The new tax regime offers you concessional rates upto total taxable income of Rs.15 lakhs with tax slabs of 5%, 10%, 15%, 20% and 25% on the income slabs advancing by 2.50 lakhs starting from the basic exemption of Rs.2.50 lakhs. In case one wishes to avail the benefits of reduced tax slab rates under the new tax regime in place of existing tax slabs one has to forgo various tax deductions and exemptions available under old tax regime.

As far as salaried are concerned they are not entitled to avail major benefits like Standard Deduction, House Rent Allowance, Leave Travel Assistance etc. in case they opt for the new tax regime. The retired senior citizen will not be able to claim standard deduction in respect of pension from ex employer as well as deduction in respect of interest from post office and banks u/s 80TTB if you opt for new tax regime.

Moreover various deductions under Chapter VIA like under Section 80C (comprised of various items like EPF, LIP, School Fee, PPF, NSC, ELSS, home loan repayment etc.), 80 CCD(1) & 80 CCD(1B) (for NPS) 80D (for health insurance premiums) 80 D for mediclaim, 80 G for donations, 80TTA for interest on saving bank account etc. will also not be available to the taxpayers.

In case you have borrowed money for buying a house or for repairs of the house which you claim to be self-occupied, you are not eligible to the benefit of deduction for interest paid which is available upto Rs.2 lakhs every year. You will also not be able to set off the current loss as well as brought forward loss under the head house property against current income if you opt for new scheme. Not only that you are not allowed to carry forward any losses in respect of house property for let out properties.

The cumulative benefit for moving to a new tax scheme is around Rs.75,000/- plus 4% cess if your total income is Rs.15 lakhs. As many exemptions and deduction can be claimed and since composition of these tax benefits vary from person to person, a readymade answer cannot be given as to which scheme works for you. However, looking at the tax benefits which majority of the taxpayer have to forgo, the benefits available with existing regime outweigh the benefits of lower rates available under the new regime specially in case of salaried people and those who have taken home loan.

How to exercise the option to go for the new scheme and switching between old and new scheme

For those who do not have business income have to exercise the option every year by filing Form 10IE along with ITR but by the due date of filing the ITR. i.e. 31st July and option once exercised for a particular year cannot be changed if you wish to file a revised return. So please take into account all the income, exemptions and deduction when opting for the scheme for a particular year. Please note opting for the new tax regime with your employer is not treated as exercising the option under the income tax laws. The exercise of option with employer is for a limited purpose and you can decide to opt for alternative scheme while filing the ITR. Please ensure to file your ITR by the due date if you wish to opt for new tax regime as the option is not available after expiry of the due date. However, You can switch opt remain in old scheme in one year and in new scheme in the very next year.

Want to Opt in New-Tax Regime? Income Tax Form 10IE enabled for FY 21-22 (AY 22-23)

For those who have business income have to exercise the option once and for all first time by filing Form 10IE before the due date of filing of ITR though the ITR can be filed later on. Such a person can only opt to come out of the new tax regime only once and then is not allowed to go back to new tax regime unless there is no business income for that year. So you need to be very careful while opting for new tax regime in you have business income and have to take into account income composition of not only the relevant years but also of all future years.

How does the scheme work?

Let us understand how the scheme works with examples. Almost all the salaried employees either have benefit of HRA for rent paid or have bought a house with home loan. Presuming you have bought a house with home loan then you will not be able to claim the benefits of home loan for interest and principal repayment of Rs.3.50 lakhs together. After taking into account the fact that you also will have to forgo the claim of standard deduction of Rs.50,000/- if you opt the new regime making the total benefit forgone Rs.4,00,000/- resulting in tax impact of Rs.80,000 if you are in 20% tax slab having income between 5 lakhs to 10 lakhs. The net tax benefit forgone is higher than the benefit of Rs.62,500/- accruing to you under new scheme. For those who are in 30% tax slab the tax effect of the benefit forgone @ 30% would be 1.20 lakh against the benefit of Rs.75,000/- accruing under the new regime. We can also incorporate exclusive benefit available in respect of NPS of Rs.50,000/- available under Section 80
CCD(1B). So in all probability the new scheme does not look attractive for a salaried person. A salaried should compute his final tax liability while filing the ITR and opt the scheme which helps him optimise his tax outgo.

From the above example it becomes apparent that whether one is in 20% tax slab or 30% the existing scheme is better for the one who avails all the basic deductions normally availed by persons. Let us move to an example where the person has income upto Rs.7 lakhs and who will have to pay tax of Rs.32,500/- if opts new regime. However if he is able to claim deduction under Section 80 C for Rs.1.50 lakhs and a deduction of Rs.50,000/- under Section 80 CCD(1B) for NPS and reduce his total income below 5 lakhs, he will not have to pay any tax by availing rebate u/s 87A upto Rs.12,500/-. So by investing two lakh rupees one will be able to save tax Rs.32,500/- by remaining under old regime. However, this scheme will work for self-employed who do not wish to spare money for making eligible investments to claim various deductions.

To sum up Balwant Jain is a tax and investment expert and can be reached at [email protected] and @jainbalwant on twitter.