The much-awaited budget for the forthcoming financial year was presented in the parliament this week. In the run up to the budget, there were lots of hopes and opinions expressed with respect to the wish lists of a salaried taxpayer. Expectedly there was an announcement related to the new tax regime which has evoked mixed feelings among the salaried class. While proposing the changes to the new tax regime, the honourable finance minister had laid emphasis to benefit the “hard-working middle class” by way of providing major relief to the taxpayers. Let us now examine whether it really makes sense for a salaried professional to consider switching over to the new regime.
What’s ‘new” in the New regime?
For a salaried professional there are 4 major announcements that is worth examining:
> The benefit of standard deduction has been extended to the taxpayers under the New tax regime as well.
> It has been proposed to enhance the rebate limit to Rs.7 lakhs from the existing 5 lakhs under the New income tax regime.
> The number of tax slabs under the New regime will be reduced to 5 instead of 6 and the basic tax exemption limit has been increased to 3 lakhs from 2.5 lakhs.
> New income tax regime will be the default tax regime.
The above proposals may sound very impressive for a middle-income earner, Let’s have a closer look at what the new regime has to offer!
Firstly, on the rebate part, there can be a misconception that the first 7 lakhs of income will not be subject to income tax and the slab rates will be applicable only for incomes above 7 lakhs. We need to bear in mind that proposal is not a tax exemption, but a rebate – meaning if the taxable income is below 7 lakhs, then the individual need not have to pay any taxes. If the taxable income is above 7 lakhs, then the individual is subject to pay taxes on the entire amount basis the new tax slabs proposed in the budget. The below table provides the proposed tax slab for new tax regime:
| Taxable Salary | Tax rate |
| Up to 3 lakhs | 0% |
| 3 lakhs – 6 lakhs | 5% |
| 6 lakhs – 9 lakhs | 10% |
| 9 lakhs – 12 lakhs | 15% |
| 12 lakhs – 15 lakhs | 20% |
| above 15 lakhs | 30% |
For example, if my net taxable income is 10 lakhs, then I will have to pay Rs.60,000 plus the applicable cess in taxes as per the new tax slabs proposed in the budget. Then, who benefits from this proposed change? Clearly there is a winner on cards for those salaried professionals who earn up to Rs. 7.5 lakhs as the standard deduction of Rs.50,000 which has been introduced for the new tax regime will bring the net taxable income below 7 lakhs and the individual need not pay any taxes.
What happens when the salary levels go up? Does it make sense to continue in the new tax regime, considering the normal financial circumstances of a middle-class professional? Will the old regime prove to be friendlier? Let’s delve deeper.
Old tax regime – Still beneficial for tax planning
Most of us continue to be in the old tax regime which provides numerous avenues for claiming tax deductions and exemptions but consumes relatively higher amount of time and effort for tax planning. While the new tax regime is simple and easy to compute, should we trade off the tax saving benefits of old regime for simplicity offered under new regime? The answer is No.
As the salary levels go up, the need for efficient tax planning also comes up. We believe tax planning is an important step that ensures financial wellness due to the following aspects:
> Proper tax planning results in significant tax saving
> Saving is the crucial first step that a salaried individual must take in the journey of financial wellness.
From the above two fundamental perspectives, it pays to remain in the old regime for people earning above Rs 7.5 Lakhs per year. Bear in mind that the old regime evolved over a long period of time with provision for exemptions and deductions that can help a taxpayer when he plans for his safety net. With an intent to have a safety net, most individuals will plan the following allocations/expenses and tax exemptions provided by the old tax regime goes a long way in incentivizing them to build a safety net.
> Housing and Education – There are many salaried individuals, who live on rented premises, and they can benefit from claiming House rent allowance (HRA) to lower their tax outgo. Apart from this, interest payments on housing loans up to Rs 2 lakhs and interest payments on educational loans can be claimed as tax deductions. These are genuine aspirational expenditures incurred by a middle-class income earner and the new tax regime will not provide any scope for tax deductions on these interest expenses.
> Emergency Medical needs & Retirement planning – In a country with low levels of social security cover, the onus is always on the salaried professional to allocate a portion of their income to meet unforeseen emergencies and to save and invest for securing the financial future of their family. The old regime provides a nudge to save and plan for unforeseen medical emergencies, and to have a sizable nest egg during retirement and at also to have a buffer if an employee meets an unfortunate event like a layoff! Contributions towards Provident fund, Payment of Life insurance premium, investments in Equity linked Savings Schemes (ELSS) offered by mutual funds, small saving schemes like PPF are some of the eligible investments where tax deductions can be claimed by an individual. Though the overall limit for tax deduction is capped at Rs.1,50,000 per year, the old regime offers an option to save and secure along with tax breaks. Additionally, Medical expenses/payment of health Insurance premium up to Rs 75,000 (for dependant spouse, children, and senior citizen parents) can be exempted under section 80D. In a country with lower levels of awareness about personal finance, at least the tax breaks offered by the old regime will incentivise the employee to think in terms of savings for the future.
> Lifestyle spends through Flexible benefits – Flexible benefits are certain allowances given for categories like Food, Communication, Fuel, books & periodicals etc and the spending under these categories are tax exempt either wholly or partially. Flexible benefit allowances (FBA) can be claimed for tax exemption only under the old regime. Presence of FBA in a salary structure helps with significant tax savings and the old regime aids to have such employee friendly compensation structures.
The below table illustrates the benefits of staying in the old regime vis-à-vis the new tax regime as the income levels go up:
| Details | Amount | Amount | Amount | Old regime | New regime |
| Gross Pay | 1,000,000 | 1,500,000 | 2,000,000 | ||
| Basic | 400,000 | 600,000 | 800,000 | Taxable | Taxable |
| HRA | 200,000 | 300,000 | 400,000 | Partial exemption can be claimed | No exemption |
| Flexible Benefit Allowance (assumed to be 10% of the gross pay) | 100,000 | 150,000 | 200,000 | Exemption can be claimed | No exemption |
| PF contribution by employee – 12% of basic salary (Exempt up to 1.5 lakhs under section 80C) | 48,000 | 72,000 | 96,000 | Exemption can be claimed | No exemption |
| PF contribution by employer | 48,000 | 72,000 | 96,000 | No exemption | No exemption |
| Other allowances | 204,000 | 306,000 | 408,000 | No exemption | No exemption |
| Standard Deduction | 50,000 | 50,000 | 50,000 | Deduction can be claimed | Deduction can be claimed |
| Interest payment on Housing loan | 100,000 | 100,000 | 100,000 | Deduction can be claimed up to 2 lakhs of interest payment | No deduction |
| Tax deductible investments including PF contribution by employee under section 80C | 100,000 | 100,000 | 150,000 | Deduction can be claimed up to 1.5 lakhs | No deduction |
| Exempted portion of HRA (HRA received assumed as rent paid minus 10% of basic salary) | 160,000 | 240,000 | 320,000 | Exemption can be claimed | No Exemption |
Based on the above illustration, the taxable salary and tax to be paid in both the old and the new regime is provided below. The tax saved when one invests in the old regime as per the declarations above is also highlighted.
| Details | Amount | Amount | Amount |
| Gross Pay | 1,000,000 | 1,500,000 | 2,000,000 |
| Net taxable Salary under Old Regime | 442,000 | 788,000 | 1,084,000 |
| Net taxable Salary under New Regime | 902,000 | 1,378,000 | 1,854,000 |
| Tax to be paid under old regime | NIL (Qualifies for Rebate under 87A) | 70,100 | 137,700 |
| Tax to be paid under New Regime | 45,300 | 125,600 | 256,200 |
| Taxes saved under old regime | 45,300 | 55,500 | 118,500 |
The new default tax regime
The budget has proposed to make the new income tax regime as the default tax regime. This means taxpayers will have to opt for the old tax regime from the new financial year onwards. This requires some careful analysis of the tax planning components as mentioned above.
Conclusion:
New tax regime finds favour for salaried employees at lower levels of income with its concessional tax rates and simplicity of computation. As the income level goes up and considering the practical financial circumstances of middle-class, tax planning becomes very crucial and old tax regime certainly helps to reduce the tax outgo by a wide margin. In other words, it is worth taking the trouble of computing multiple exemptions and deductions when you opt for the old regime as it materially adds to the savings pool.
Disclaimer: The views expressed are personal. The author of the article is not a qualified tax consultant. The article has been prepared for information purpose only. Individuals are advised to consult their tax consultant for further views.