Updated: Sun, 01 May 2022 09:57 AM IST
New Delhi | Balwant Jain: There has been a lot of confusion about new tax regime. People are not able to decide which one to opt for. Let us discuss broadly the new tax regime.
Basics of new tax regime
The new tax regime is available only to Individuals and HUF and is optional. The new tax regime offers you concessional rates upto income of Rs. 15 lakhs with tax slabs of 5%, 10%, 15%, 20% and 25% on the income slabs advancing by 2.50 lakhs starting from the basic exemption of Rs. 2.50 lakhs. In case one wishes to avail the benefits of reduced tax slab rates in place of existing tax slabs one has to forgo various tax deductions and exemptions.
As far as salaried are concerned they will not be able to avail major benefits like Standard Deduction, House Rent Allowance, Leave Travel Assistance etc. in case they opt for the new tax regime. The retired senior citizen will not be able to claim standard deduction in respect of pension from ex employer as well as deduction in respect of interest from post office and banks u/s 80TTB if you opt for new tax regime.
Moreover various deductions under Chapter VIA like under Section 80 C (comprised of various items like EPF, LIP, School Fee, PPF, NSC, ELSS, home loan repayment etc.) , 80 CCD(1) & 80 CCD(1B) (for NPS) 80D (for health insurance premiums) etc. will also not be available to the taxpayers.
In case you have borrowed money for buying a house or for repairs of the house which is occupied by you or your parents/relatives on which no rent is received you will have to forgo the benefit of deduction for interest paid which is available upto Rs. 2 lakhs every year. You will also not be able to set off the current loss as well as brought forward loss under the head house property against current income if you opt for new scheme. Not only that you are not allowed to carry forward any losses in respect of house property. The right to carry forward the loss is also like tax credit available to you adjustable against future tax liability.
The cumulative benefit for moving to a new tax scheme is around Rs. 75,000/- if your total income is Rs. 15 lakhs. As many exemptions and deduction can be claimed and the composition of these tax benefits can vary from a person to another, a readymade statement cannot be prepared showing as to which regime is beneficial. However looking at the tax benefits which majority of the taxpayer will have to forgo, the benefits available with existing regime will outweigh the benefits of migrating to new regime specially in case of salaried people and those who have taken home loan.
How the scheme will work?
Let us understand the tax implications with an example. Since almost all the salaried employees will either have benefit of HRA for rent paid or they may in all probability would have bought a house with home loan. Presuming you have bought a house with home loan then you will not be able to claim the benefits of home loan for interest and principal repayment of Rs. 3.50 lakhs together. After taking into account the fact that you also will have to forgo the claim of standard deduction of Rs. 50,000/- if you opt the new regime making the total benefit forgone Rs. 4,00,000/- resulting in tax impact of Rs. 80,000 if you are in 20% tax slab having income between 5 lakhs to 10 lakhs. The net tax benefit forgone is higher than the benefit of Rs. 62,500/- accruing to you opting new scheme. For those who are in 30% tax slab the tax effect of the benefit forgone @ 30% would be 1.20 lakh against the benefit of Rs. 75,000/- accruing by opting for new regime.
From the above example it becomes apparent that whether one is in 20% tax slab or 30% the existing scheme is better for the one who avails all the basic deductions normally availed by persons. We can incorporate exclusive benefit available in respect of NPS of Rs. 50,000/- available under Section 80 CCD(1B).
Let us move to an example where the person has income upto Rs. 7 lakhs and who will have to pay tax of Rs. 32,500/- if opts new regime. However if he is able to claim deduction under Section 80 C for Rs. 1.50 lakhs and a deduction of Rs. 50,000/- under Section 80 CCD(1B) for NPS and reduce his total income below 5 lakhs, he will not have to pay any tax by availing rebate u/s 87A upto Rs. 12,500/-. So by investing two lakh rupees one will be able to save tax Rs. 32,500/- by remaining under old regime.
How to switch between new and old pension scheme?
For those who do not have business income have to exercise the option while filing their ITR but by the due date of filing the ITR i.e. 31st July 2022. Such person can opt every year whether to remain in old scheme or new scheme. The option exercised for a particular cannot be changed for that particular year if you wish to file a revised return.
For those who have business income have to exercise the option before the due date of filing the ITR and not necessary while filing the ITR and can only opt to come out of the new tax regime only once and can not again opt for new tax regime.
(Disclaimer: Balwant Jain is a tax and investment expert and views expressed in this article are of the author.)