Introduction
Income tax is a type of tax that is directly imposed by the government on individuals and entities based on the income they earn or the profits they generate during a financial year. The revenue collected through income tax is utilized by the government to fund various public welfare initiatives, such as developing infrastructure, providing healthcare and education, and maintaining law and order. The amount of tax an individual or entity is required to pay is based on the income tax laws established by the Income tax Act of 1961 in India.
The Income tax Act of 1961 governs the computation, assessment, and collection of income tax in India. The Act is regulated by the Central Board of Direct Taxes (CBDT), which is a statutory authority that falls under the Department of Revenue in the Ministry of Finance. The CBDT is responsible for implementing the provisions of the Income tax Act, which includes ensuring compliance with the income tax laws in India, providing guidance and assistance to taxpayers, conducting audits and investigations, and enforcing penalties and fines for non-compliance with the income tax laws.
Comparing the Two Tax Regimes
The two income tax regimes in India are the old tax regime and the new tax regime.
In the older tax regime of India, individuals' income is taxed based on the income they earn, with the tax rates varying as per the income slabs. Apart from this, taxpayers can also claim several deductions and exemptions, such as home loan interest, tuition fees, medical insurance, charitable contributions, etc., to lower their taxable income. However, compared to the new tax regime, the tax rates in the old tax regime are comparatively higher. This regime offers taxpayers with more options to reduce their tax liabilities, but the overall tax burden remains higher than the new tax regime.
Introduced in the year 2020, the new tax regime in India provides lower tax rates to individuals who are willing to give up the deductions and exemptions that were available under the old tax regime. The new tax regime has seven different tax slabs, and the tax rates vary between 5% to 30% based on the respective income levels of the individuals. The new tax regime aims to simplify the tax structure and decrease the compliance burden on taxpayers, making the tax-filing process easier and more straightforward for the citizens.
The new tax regime is also an excellent opportunity for individuals who don't have many tax-saving investments, making it easier for them to file their taxes without any hassles. Additionally, the regime eliminates the need for taxpayers to keep track of various deductions and exemptions, making it simpler and more transparent. However, taxpayers need to evaluate their financial goals and tax-saving requirements before switching to the new tax regime, as it may not always be beneficial for them.
When it comes to tax savings, the old tax regime offers more opportunities through various deductions and exemptions, whereas the new tax regime offers lower tax rates but limited tax-saving options. The choice between the two regimes primarily depends on the individual preferences, their financial goals, and their tax-saving requirements. Therefore, taxpayers should carefully evaluate both regimes' pros and cons to decide which regime suits them the best based on their financial situation and tax liabilities.
While the old tax regime offers taxpayers more opportunities to reduce their tax liabilities through deductions and exemptions, it may not be the best option for everyone. Taxpayers who prefer a simpler tax-filing process and want to take advantage of lower tax rates may opt for the new tax regime.
Tax Slabs and Rates Under the Old and New Tax Regimes
| Annual Income | Old Tax Regime | New Tax Regime |
|---|---|---|
| Up to Rs. 2,50,000/- | NIL | NIL |
| Rs. 2,50,000 – Rs. 5,00,000/- | 5% | 5% |
| Rs. 5,00,000 – Rs. 7,50,000/- | 20%`` | 10% |
| Rs. 7,50,000 – Rs. 10,00,000/- | 20% | 15% |
| Rs. 10,00,000 – Rs. 12,50,000/- | 30% | 20% |
| Rs. 12,50,000 – Rs. 15,00,000/- | 30% | 25% |
| Above Rs. 15,00,000/- | 30% | 30% |
Calculation of Tax Liability Under Both Regimes for an Income of Rs. 15 Lakh
The tax liability computation for an income of Rs. 15 Lakhs under both the old and new tax regimes can be illustrated as follows:
Under the old tax regime:
- Standard deduction of Rs. 50,000 applies
- Deductions under Section 80C of up to Rs. 1.5 lakh are available
- Deduction under Section 80D for medical insurance of up to Rs. 25,000 is available
- Deduction on home loan interest of up to Rs. 2 lakh is available
- Taxable income after deductions is Rs. 8,50,000
- Tax liability is Rs. 1,72,500
Under the new tax regime:
- There are no deductions or exemptions applicable.
- The taxable income amounts to Rs. 15,00,000.
- The resulting tax liability is Rs. 1,87,500.
Based on the calculations provided, it is evident that the tax liability for an income of Rs. 15 lakhs under the old tax regime is Rs. 1,72,500, while under the new tax regime, it is marginally higher at Rs. 1,87,500. It is crucial to note that under the new tax regime, taxpayers are not entitled to claim deductions and exemptions, which may be advantageous for individuals with specific tax-saving objectives.
Which Tax Regime Should I Choose if My Income is Above 15 Lakh?
When considering the choice between the old and new tax regimes, it's worth noting that the recent changes have a significant impact on salaried individuals earning Rs 15 lakh. The removal of the 25 percent tax slab under the new tax regime is a key factor to consider.
Although the new tax regime offers a lower tax rate of 20 percent for those earning Rs 15 lakh, the old tax regime provides the advantage of deductions and exemptions, which can reduce overall taxes. Despite the old tax regime imposing a steep 30 percent tax bracket for individuals earning Rs 15 lakh, the benefits of deductions outweigh the high tax bracket.
For an individual earning Rs 15 lakh, selecting the old tax regime and claiming deductions worth Rs 3.75 lakh would result in total taxes of Rs 1,40,400 per annum, leading to a yearly saving of Rs 5,200 compared to the new tax regime that became effective from April 1st. The savings are even more significant when compared to the existing new tax regime, with a tax saving of Rs. 54,600. Therefore, despite the modifications in the new tax regime, it may not be a financially sound decision for individuals earning Rs 15 lakh to opt for it.
To choose between the old and new tax regimes, consider your financial situation and tax-saving requirements. The recent tax changes affect those earning an income of Rs 15 lakh. However, the old tax regime with deductions and exemptions may reduce overall tax liability. Consult with a tax professional or financial advisor to determine the best option. Stay informed about future tax changes that may impact your tax liability.
Frequently Asked Questions
A tax regime in India is governed by the Income tax Act, where individuals need to pay taxes on their income. The recent changes, including the introduction of a new income tax slab and removal of certain deductions, impact one's tax liability.
To choose the appropriate tax regime, take into account your income level, deductions and exemptions available, and financial goals. It's recommended to seek advice from a tax professional to determine which tax regime suits your individual situation and can effectively minimize your income tax liability.
The old and new income tax regimes have varying tax rates, deductions, and exemptions. While the new regime offers lower tax rates, it has limited deductions and exemptions. On the other hand, the old regime provides higher tax rates but has more allowances.
