Do you feel that choosing between new or old tax structure is too hard and calculating tax is not worth an effort? Think Again.

Calculating tax isn’t that complicated. It’s quite simple – or at least the basics are. You don’t have to be a CA to do this. But the basics are not enough to save money for you, right

Wrong!

Here’s the truth:

Most of you who are salaried (not running a company or business) have a limited understanding of Taxes but tax calculation is pretty straight forward for you. So you often only need to get the basics right to save money.

In this post, you will learn about: 

  1. The basic difference between new and old tax structure
  2. Exemptions and deductions available in old tax structure
  3. A stepwise guide to figure out which structure is best for you using our calculator

The new income tax regime is the talk of the town, some people might argue that it is better simply just because tax slabs have been reduced. However, jumping to this conclusion is not right as there are factors that influence the payable tax under both regimes. 

In the last Budget proceedings, this new optional personal income tax regime was introduced to simplify filing taxes. But this simplification comes with a cost, which is foregoing exemptions and deductions. 

Moreover, to wisely judge which one is better for you, you will have to calculate payable tax under both regimes. 

Let’s get started without much ado now.

1. The Basic Difference In New and Old Tax Structure

It is no surprise that the tax you pay is based on the income you make. Payable taxes are calculated based on respective tax rates for different income levels. These personal income tax rates are given below: 

Income tax slabs

Source: Refreshmint.in 

For all income levels below ₹5 lakh and above ₹15 Lakh (orange income slabs in the table), there is no difference in tax rates under the old and new tax regime. 

However, the main differentiating effect is for incomes between ₹5 lakh and ₹15 Lakh (green income slabs in the table). 

If your income is above ₹5 lakh, then whether you should choose old or new will depend on whether you avail exemptions and deductions or not. 

For example, you are supposed to earn ₹15 lakh in a year. Then deductions of ₹2.5 lakh or more will result in a lower tax burden in the old tax regime as compared to the new tax regime. 

This effect of deductions is explained with more detail in section 3.

2. Exemptions and Deductions Available In Old Tax Structure

Exemptions and deductions are true factors that must be considered before opting for a tax regime. As mentioned above, for simplifying income tax filing the new tax regime does not offer any exemptions or deductions. 

Whereas, the old tax regime provides various exemptions and deductions which can be used to reduce your taxable income. These are mentioned below: 

  • Standard deduction: ₹ 50,000 (for salaried persons only)
  • House rent allowance: Depends on salary structure and rent paid 
  • Housing loan interest: ₹ 2 lakh for others
  • Investments under Sec 80C: ₹ 1.5 lakh
  • NPS contribution: ₹ 50,000
  • Medical insurance premium: ₹ 25,000 (₹ 50,000 for parents and senior citizens)
  • Savings bank interest: ₹ 10,000 under Sec 80TTA
  • Education loan interest: Interest paid for eight consecutive years
  • Children’s Tuition Fees 
  • Disability of self or dependant: ₹ 75,000 to ₹ 1.25 lakh depending on the disability
  • Treatment of self or dependant for specified disease: ₹ 40,000 (₹ 1 lakh for senior citizens)

Exemptions and Deductions Encourage Saving and Investing!

Above mentioned exemptions and deductions are provided when you save in NPS, invest in specific mutual funds, etc. Likely, any premiums you pay on your medical insurance also reduce your taxable income. 

Most of the deductions under the old regime will not only reduce your tax but also give to some added benefit. 

For instance, having a medical insurance policy is something that is recommended for all to secure themselves from emergencies. Moreover, if having such a policy also reduces your tax burden, then this policy gives you double benefits. 

Therefore, the old tax regime incentivized taxpayers for saving and investing for their own good. These incentives are not provided in the new tax regime. 
Note: The only scenario where the new tax regime is a better alternative is when you do not use these deductions.

3. A Stepwise Guide To Figure Out Which Structure Is Best For You Using Our Calculator

You can’t optimize your taxes to the max without knowing which exemptions are you going to do if you choose an old tax structure. The new tax structure is pretty straightforward and easy to understand. 

Here is the link to Calculator to do the basic math!

Please do not make any changes in this google spreadsheet. Click on → “File” (upper left corner) → Click on “Make a copy” →  (pop will come) Click on “OK”. 

The calculator will look like below. You only need to put input values of respective components in the “input value” column i.e column C. As you fill out the details, the calculator will show you your monthly tax outflow (at the bottom). 

a. Salary Component Fields Are From Salary Slip You Get From Your Company.

Here a sample salary slip you must be getting it on your email every month from your company’s HR. If you are not getting a salary slip, please contact your HR to know your basic pay, HRA, etc.

Remember, you need to fill out annual values in the calculator. So multiple all components in salary slip by 12 to get annual values of basic pay, HRA, etc. 

For simplification, I am taking below values: Annual gross income of ₹11.4 Lakh.

Component Monthly Annually
Basic pay ₹50,000 ₹6,00,000
HRA ₹25,000 ₹3,00,000
Other allowance ₹20,000 ₹2,40,000
Total Income  ₹95,000 ₹11,40,000
Professional Tax (PT) ₹200 ₹2,400
Rent paid  ₹8,333.33 ₹1,00,000

 

Once you fill out these details in the calculator, it will look like this:

Source: Refreshmint.in 

b. Filling Out Deductible Components In Section 80C

The green tabs represent widely-used deductions. In these green tabs, you will find insurance-related which provides double benefits &  investment-related deductions which provide tax benefits. You can claim a deduction of ₹1.5 lakh your total income under section 80C.

Source: Refreshmint.in 

For simplification purpose, I am taking below values:

Components under Section 80C Annual Deduction
Provident Fund  ₹21,600
Life insurance ₹10,000
ELSS ₹1,20,000
Total  ₹1,51,600

Remember, even though the total deduction under section 80C exceeds ₹1,50,000 by ₹1,600. But you can only avail deductions up to ₹1.5 lakh because this is the maximum allowed amount under this section.

Moreover, Life insurance, investments, home loan repayments and children’s tuition fees come under section 80C.

c. Other Deductible Sections To Save Tax In Old Tax Structure

There are several other sections in the old tax structure to save tax. Few of them are available in the new tax structure as well. If you are opting for any of them, please fill out the input values for the respective section. Else leave them blank or zero.

I am assuming no deductions towards these sections for simplification purposes as well as most of the salaried people do not use these sections.

Source: Refreshmint.in 

The taxable income in the old tax structure after putting all values is ₹8,37,600 and taxable income with the new structure is ₹11,40,000. 

Now the following table represents the tax amount that has to be paid:

Source: Refreshmint.in 

In the table above, you will see that under the old regime the tax burden is 22% less than the tax burden under the new regime if your income is ₹11.4 lakh and you use the deductions as explained above. 

Here is the link to Calculator to do the basic math!

Above calculation is used as an example. You have to calculate for yourself.

All you have to do is input your income and other details in the ‘input values’ column (yellow column) only in the sheet we provide you. 

Additionally, you also can input any other deductions you already use or wish to use in the future.

Conclusion 

To choose between which the two tax regimes are not as straightforward as it appears. To make a well-informed decision you must calculate and check for yourself. 

You will find numerous calculators online to help you with the selection. But none of these calculators tells you the importance of availing exemptions and deductions. 

I cannot emphasize more on the implicit benefit of these deductions. They not only reduce tax burden but also help you to save, invest, and secure yourself. 

Above are qualitative factors that affect your selection with a quantitative tool. Make use of it.  


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