Income Tax News: New or Old tax regime - Which one to Opt for and Why?

Income Tax News: Taxpayers must make a critical choice at the beginning of the new fiscal year: whether to use the new income tax system or continue with the previous one. Their tax obligations and financial planning will be significantly impacted by their decision. In order to make an informed choice, it is necessary to comprehend the distinctions between the two regimes and their corresponding tax rates.

Old Tax Regime

Taxpayers benefitted from a variety of deductions and exclusions under various parts of the Income Tax Act during the previous tax regime. These deductions cover things like life insurance premiums, house loan interest payments, investments in programmes like the Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), and National Pension System (NPS). There are also deductions available for costs like college loan interest, medical insurance payments, and donations to charity.

Under the previous system, tax rates were set in slabs according to an individual's income and age. Under the previous system, the tax rates for the fiscal year 2023–2024 are as follows:

• Up to Rs. 2.5 lakh: Nil
• Rs. 2.5 lakh to Rs. 5 lakh: 5%
• Rs. 5 lakh to Rs. 10 lakh: 20%
• Above Rs. 10 lakh: 30%

A 4% cess is also applied to the total amount of income tax that must be paid.

New Tax Regime

The new tax Regime, which was unveiled in the Union Budget 2020, offers reduced tax rates but does away with the majority of the previous system's deductions and exemptions. Under the new system, taxpayers are no longer able to deduct expenses or investments from their taxes under certain provisions of the Income Tax Act.

For the fiscal year 2023–2024, the tax rates under the new regime for individuals under 60 are as follows:

• Up to Rs. 2.5 lakh: Nil
• Rs. 2.5 lakh to Rs. 5 lakh: 5%
• Rs. 5 lakh to Rs. 7.5 lakh: 10%
• Rs. 7.5 lakh to Rs. 10 lakh: 15%
• Rs. 10 lakh to Rs. 12.5 lakh: 20%
• Rs. 12.5 lakh to Rs. 15 lakh: 25%
• Above Rs. 15 lakh: 30%

A 4% cess is also applied to the total tax payable under the new regime, just like it was under the previous one.

Which One to Opt For and Why?

The choice between the old and new tax regimes is influenced by a number of variables, such as the taxpayer's income level, investment portfolio, and deduction eligibility.

The previous system may have been more advantageous for those who had substantial investments in tax-saving strategies and were able to deduct different expenses because it allowed them to reduce their taxable income and save money on taxes. Furthermore, those with higher income levels might profit from the tax breaks offered by the previous administration.

Considerations for Taxpayers with Limited Assets and Deductions

However, taxpayers without significant assets or deductions might favour the new regime's simplicity and lower tax rates. Tax outflows for those in specific income bands may be decreased as a result of the lower tax rates, particularly for those making between Rs. 5 lakh and Rs. 15 lakh.

To choose the tax system that best suits their overall financial goals and objectives, taxpayers must assess their unique financial circumstances and maybe seek advice from financial professionals. It's important to consider the trade-offs of giving up the deductions and exemptions that were available under the previous regime, even while the new regime offers lower tax rates.