Confused about the new tax regime? Here's when you should opt for it

The deadline to file your income tax returns is approaching fast, and Sana is perplexed. All of 23, she's just started earning and working at an MNC, earning Rs 7,00,000 per annum, and can't figure out which tax regime would work best for her. If you're having the same concerns and can't seem to wrap your head around the new tax regime, here's a ready reckoner for you:

When should I choose new tax regime?
Think of choosing a tax regime as having to choose a friend in office. The old tax regime is that aged, wise senior who has answers and hacks for everything. Want to get over with a boring project quickly? They will certainly have a trick up their sleeve! On the other hand, the new regime is far more chilled out, lax and is a no-nonsense person who wants nothing to do with long documents and longer meetings.

The new regime was introduced in budget 2020 to simplify taxation, and offer lower rate of taxes as compared to the old regime. However, there's a catch. You cannot claim the 70+ exemptions and deductions that help bring down your taxable income and hence, reduce your tax liability. This option is exclusively available under the old tax regime.

The main USP of this tax regime? Lower tax rates, and fuss of deductions! Consider this. If your income is within the range of Rs 5,00,000-Rs 12,00,000, and you have no investments, house rent allowance (HRA), health/life insurance premiums or other such deductions to claim, the new tax regime would obviously make more sense to you, given the significant difference in tax liabilities (just 5% under new regime, and a whopping 20% in old regime for those in the Rs 5-6 lakh bracket!)


So, if you're someone who hates complex tax calculations, wants minimal tax deductions, the new regime might just be for you! But remember, there are two conditions under which this new regime will be automatically chosen for calculating your taxes:

• If you keep procrastinating and don't file your ITR till July 31, 2024
• If you do not specifically opt for the old tax regime on your employer's HR portal

Also, if you earn less than Rs 3,00,000 per annum, you are completely exempted from paying any tax at all. In the old regime, this basic limit is slightly lower at Rs 2,50,000.

Also read: All you need to know about the new tax regime

So, what do I get under this regime?
Thanks to a rebate under Section 87A, if you earn up to Rs 7 lakh per annum, your tax liability (and Sana's as well) will effectively be zero. This is limited to Rs 5 lakh under the old regime. While a standard deduction of Rs 50,000 is available under both of them (so you can directly deduct Rs 50,000 from your total income before even beginning to calculate your tax liability), there are a lot more deductions and exemptions that this regime DOES NOT allow you to avail:

• Leave Travel Allowance (LTA)
• House Rent Allowance (HRA) (Comes in handy if you're paying hefty rents in metros)
• Interest on housing loan (on self-occupied property or vacant property)
• Own contribution to NPS (If there's any)
• Interest earned on savings bank A/Cs
• Investments made in ELSS, PPF
• Premiums paid towards life, health insurance policies

As for the deductions that are allowed, that makes for a pretty small list:

• Transport allowances (only if you are specially abled)
• Gifts of up to Rs 50,000
• Employer’s contribution to your NPS account
• Interest paid on home loan only on let-out property

But that's the trade-off. You get to pay taxes at low rates, yes, but you also don't get to claim a whole lot other deductions. Notes CA Nitesh Buddhadev, "Which regime is beneficial for you depends upon the allowances and deduction available to you during a relevant financial year. So, if your total income from salary is Rs 10.5 lakh and if the aggregate of any of the deductions / allowances you can claim is less than Rs. 3.15 lakh, you should opt for the new tax regime. If you have not invested in multiple tax-savings scheme, the new regime will work better.

So, don't make this decision in any haste. You can choose your tax regime only once in a financial year. And if your income from business or other professions, be even more careful, because this will then become a once in a lifetime choice for you (quite literally!). So, take a good hard look at your finances, and then decide what works best for you!