All you need to know about the new tax regime

With the last date to file your IT returns inching closer every passing day, it's time you choose your income tax regime-whether you want to opt for the old one or go for the new regime. But why is it important to make this choice carefully? Under what circumstances can the new tax regime benefit you, and how does it differ from the old tax regime? Let's find out all about it

The new tax regime was introduced in Budget 2020 as a means to simplify tax calculations and offer concessional tax rates. So, unless you do not categorically opt for the old tax regime, the new tax regime is assumed as default, and hence, your income tax liability is calculated according to it. Also, if you fail to file your taxes till 31st July, you will have to go ahead with the new tax regime, since the option to choose old regime will not be available anymore.

What are the tax rates under the new regime?

Here's a quick snapshot of the applicable tax rates under the new regime:

What deductions does the new tax regime offer?

Unlike its old counterpart, which had over 70 exemptions and deductions to bring down an individual's taxable income and hence, their tax liability, the new regime does not offer much deductions. Except for a standard deduction of Rs 50,000 and deductions for employer's contribution to your NPS, there are only a handful of deductions allowed, which include:

Transport allowance (if the individual is specially abled)
Conveyance allowance (to meet cost of travel and tour)
Perquisites for official purposes
Interest on home loan paid for a rented property

Then, there are specific exemptions with regards to voluntary retirement, leave encashment and gratuity that you can also avail under the old regime. The new regime offers a rebate of Rs 25,000 on income of up to Rs 7,00,000. This means that anyone whose total taxable salary does not exceed Rs 7 lakh annually can claim a rebate of up to Rs 25,000.

But remember, you will not be able to avail common exemptions and deductions that are available under the old regime, which include health insurance premiums, investments in tax-saving FDs, ELSS, house rent agreement (HRA), leave travel allowance (LTA), PPF, EPF and more. So, if you live on rent, or are diligently saving your hard earned money across mutual funds, PPF and more, the new regime will not have much to offer you.

When can new tax regime be better for you?

But in case you do not want excessive deductions from your income, the new tax regime works better for you. It is simple and straightforward, and can work well for those who do not want to face documentation hassles while filing their ITR, since the old regime demands multiple investment proofs.

Also, if your income is up to Rs 5,00,000, you can choose the new tax regime, given that the basic exemption limit (income up to which one does not need to pay any taxes) is slightly higher in new regime at Rs 3,00,000, as compared to Rs 2.5 lakh in old regime.

Experts also note that if the total of all your deductions does not exceed Rs 1.5 lakh, new regime could be better for you. However, do not make this decision simply by looking at low tax rates. Assess your outflows and then the deductions and exemptions you are eligible under both the regimes. It is a good idea to also compare your income under both the regimes using IT department's tax calculator. Only then, take a final call.