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New Tax Regime versus old tax regime: The Center in the July Union Budget introduced some changes in the new tax regime, increasing the standard deduction by Rs 25,000 to Rs 75,000 and adjusting the slab. No changes have been made to the old tax regime, which provides taxpayers with benefits in the form of deductions and exemptions. So, have the recent changes in the new tax regime made it more attractive to taxpayers?
In this article, we will try to understand which income tax regime is better for you if you earn Rs 10 lakh annually.
Tax deductions and exemptions under the old tax regime:
The old tax regime allows taxpayers to claim various deductions and exemptions. If you plan your investment carefully, you can take advantage of deductions under Section 80C (up to Rs 1.5 lakh), 80D (for health insurance premiums) and the standard deduction of Rs 50,000, among others. These deductions can significantly reduce your taxable income, which may make this regime more beneficial if you actively make use of these facilities.
From this calculation, let us understand how much tax you can save on an annual income of Rs 10 lakh under the old tax regime, if you plan your investment wisely.
Also read: Have you missed reporting of foreign assets in ITR for AY 2024-25? File a revised return to avoid a fine of Rs 10 lakh
Deduction options under the old tax regime:
Standard deduction: Rs 50,000
Section 80C Deductions: Rs 1,50,000
Section 80D (Health insurance premium): Rs 25,000
Total available deductions: Rs 2,25,000
Taxable income: Rs 10,00,000 – Rs 2,25,000 = Rs 7,75,000
Tax calculation:
Up to Rs 2.5 lakh: NIL
Rs 2.5 lakh – Rs 5 lakh: 5% of Rs 2.5 lakh = Rs 12,500
Rs 5 lakh – Rs 7.75 lakh: 20% of Rs 2.75 lakh = Rs 55,000
Total tax: Rs 67,500
Discount under Section 87A: Nil (as taxable income exceeds Rs 5 lakh)
Cess for health and education (4%): Rs 2,600
Total tax payable: Rs 70,100
New tax regime – Lower tax rates but no deductions:
As mentioned above, under the new tax regime, taxpayers will not receive any deduction or exemption benefits, with the exception of the standard deduction. However, the new tax regime offers lower tax rates.
Now let’s take an example with a calculation showing how much an individual with an annual income of Rs 10 lakh will pay as income tax under the new tax regime.
New tax regime:
No deductions/exemptions are possible.
Tax brackets under the new regime are different:
Total income: Rs 10 lakh
Standard deduction: Rs 75,000
Taxable income: Rs 9.25 lakh
Tax calculation:
Up to Rs 3 lakh: zero
Rs 3 lakh – Rs 7 lakh: 5% of Rs 4 lakh = Rs 20,000
Rs 7 lakh – Rs 9.25 lakh: 10% of Rs 2.25 lakh = Rs 22,500
Total tax: Rs 42,500
Discount under section 87A: Rs 12,500 (not applicable as income exceeds Rs 7 lakh)
Cess for health and education (4%): Rs 1,700
Total tax payable: Rs 44,200
Comparison:
Tax payable under old regime: Rs 70,100
New tax due: Rs 44,200
The old tax regime offers a higher tax liability of Rs 70,100 compared to Rs 44,200 under the new regime on an annual income of Rs 10 lakh, despite deductions available under the first regime.