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The Indian taxation system is divided into two regimes: the Old Tax Regime and the New Tax Regime. The Old Regime allows for various deductions and exemptions, while the New Regime offers lower tax rates without most deductions.
Under the Old Regime, taxpayers can claim deductions under sections such as 80C, 80D, 80E, etc., reducing their taxable income. This regime is beneficial for those with substantial investments and expenses eligible for deductions.
The New Regime, introduced in the Union Budget 2020, simplifies the tax structure with reduced tax rates and fewer deductions. It benefits taxpayers with fewer investments and those who prefer a straightforward tax calculation.
Taxpayers can switch between the Old and New Regimes every financial year, except those with business income, who can switch only once.
It's essential to analyze both regimes each year to determine which is more beneficial based on your income and eligible deductions.
Income tax is a crucial aspect of financial planning for every individual and entity in India. With the introduction of the New Tax Regime in the financial year 2020-21, taxpayers now have the option to choose between two different sets of tax rates and structures: the Old Regime and the New Regime. Each regime has its own advantages and disadvantages, making it essential for taxpayers to understand the nuances of both systems to make an informed decision. This comprehensive guide will explore the details of both tax regimes, provide a comparison to help you choose the best option, and offer a step-by-step tutorial for creating a functional tax calculator.
Income tax in India is governed by the Income Tax Act of 1961. It is a direct tax levied on the income of individuals, Hindu Undivided Families (HUFs), companies, firms, LLPs, associations, bodies, local authorities, and any other juridical person. The government uses the collected tax revenue to fund various public services, infrastructure projects, and other development activities.
Assessment Year (AY): The year in which income earned during the previous year is assessed and taxed.
Financial Year (FY): The year in which income is earned. In India, it runs from April 1 to March 31.
Gross Total Income (GTI): The total income earned by an individual from all sources before any deductions.
Taxable Income: The income on which tax is calculated after deductions and exemptions.
Deductions: Specific amounts that can be subtracted from gross total income to reduce taxable income.
Exemptions: Income that is not subject to tax.
The Old Tax Regime is characterized by its multiple deductions and exemptions, allowing taxpayers to reduce their taxable income significantly.
Income Range Tax Rate
Up to ₹2.5 lakh Nil
₹2.5 lakh to ₹5 lakh 5%
₹5 lakh to ₹10 lakh 20%
Above ₹10 lakh 30%
Additional 4% cess on the total tax
Under the Old Regime, taxpayers can claim various deductions and exemptions, including but not limited to:
Section 80C: Deductions for investments in PPF, NSC, life insurance premiums, and more, up to ₹1.5 lakh.
Section 80D: Deductions for health insurance premiums.
Section 80E: Deductions for interest on education loans.
House Rent Allowance (HRA): Exemption for rent paid.
Leave Travel Allowance (LTA): Exemption for travel expenses.
The primary benefit of the Old Regime is the ability to reduce taxable income through various deductions and exemptions. This can be particularly advantageous for individuals who have significant investments or expenditures in areas covered by these deductions.
Introduced to simplify the tax structure, the New Tax Regime offers lower tax rates but eliminates most deductions and exemptions.
Income Range Tax Rate
Up to ₹2.5 lakh Nil
₹2.5 lakh to ₹5 lakh 5%
₹5 lakh to ₹7.5 lakh 10%
₹7.5 lakh to ₹10 lakh 15%
₹10 lakh to ₹12.5 lakh 20%
₹12.5 lakh to ₹15 lakh 25%
Above ₹15 lakh 30%
Additional 4% cess on the total tax
Under the New Regime, most of the deductions and exemptions available under the Old Regime are not applicable. This includes popular sections like 80C, 80D, HRA, and LTA. However, the lower tax rates are designed to compensate for the loss of these deductions.
The New Regime simplifies tax calculations by offering straightforward tax rates without the need to account for multiple deductions and exemptions. This can reduce the compliance burden and make tax filing easier for individuals with straightforward financial situations.
To illustrate the differences between the two regimes, let's consider a few examples.
Example 1: Individual with a Gross Income of ₹9,00,000
Gross Income: ₹9,00,000
Deductions (Section 80C, 80D, etc.): ₹1,50,000
Taxable Income: ₹7,50,000
Up to ₹2.5 lakh: Nil
₹2.5 lakh to ₹5 lakh: ₹12,500 (5%)
₹5 lakh to ₹7.5 lakh: ₹50,000 (20% of ₹2.5 lakh)
Total Tax: ₹62,500
4% Cess: ₹2,500
Total Tax Payable: ₹65,000
Gross Income: ₹9,00,000
Taxable Income: ₹9,00,000
Up to ₹2.5 lakh: Nil
₹2.5 lakh to ₹5 lakh: ₹12,500 (5%)
₹5 lakh to ₹7.5 lakh: ₹25,000 (10% of ₹2.5 lakh)
₹7.5 lakh to ₹9 lakh: ₹22,500 (15% of ₹1.5 lakh)
Total Tax: ₹60,000
4% Cess: ₹2,400
Total Tax Payable: ₹62,400
In this example, the New Regime results in a slightly lower tax payable.
The Old Regime may be more beneficial for individuals who:
Have significant investments in tax-saving instruments covered under Section 80C.
Pay substantial health insurance premiums (Section 80D).
Have higher HRA or LTA claims.
The New Regime may be more advantageous for individuals who:
Do not have substantial investments in tax-saving instruments.
Have a straightforward financial situation without many deductions.
Prefer a simplified tax calculation process.