Will Old Tax Regime Be Scrapped? Nirmala Sitharaman Answers Big Question

Old Regime vs New Regime: A Comparison

To compare the tax payable between the two regimes, we can take an annual income of Rs 16 lakh as an example. Under the new regime, for annual income of Rs 16 lakh, there will be zero tax up to Rs 4 lakh. Then, in the Rs 4 lakh-Rs 8 lakh bracket, a 5 per cent tax will be levied – Rs 20,000. In the Rs 8 lakh-Rs 12 lakh bracket, there will be a 10 per cent tax – Rs 40,000. And in the Rs 12 lakh – Rs 16 lakh slab, the rate is 15 per cent — meaning Rs 60,000. So, you will pay a total tax of Rs 1,20,000. With the rebates and revised tax slabs introduced in this Budget, the tax payable is Rs 50,000 less than what you are paying now.

Now if you are opting for the old regime and claiming exemptions worth Rs 4 lakh on an annual income of Rs 16 lakh, your taxable income will be Rs 12 lakh. Under the old tax regime slabs, you would pay a total income tax of Rs 1,72,500 — Rs 52,000 more than what you will pay under the new regime.

Should You Switch From Old Regime To New?

The decision on whether you should opt for the new regime would depend on your financial profile and how much exemption you can claim under the old regime.

Divya Baweja, Partner, Deloitte India, told NDTV, “To decide whether to opt for the old regime or the new regime, one would need to see that if a taxpayer were to follow the old regime, what kind of deductions or exemptions he/she should be looking at to claim benefit akin to the new regime. That comparison factor would be based on the specific individual scenario. Basis the same, one would need to evaluate the regime which is more beneficial With the widening of the slabs in the new regime, the taxpayer would need to have higher deductions or exemptions to equate the tax under the new regime.”

Old vs New Regime: The Larger Picture

Opting for the new regime would free up taxpayers from the compulsion to invest in tax benefit measures such as PPF and guaranteed return insurance policies. This would leave more money in their hands and provide more flexibility in where they invest their money. From the government’s perspective, more money in the hands of people is likely to boost consumption and contribute to economic growth. It also eases the government’s burden of paying interest on schemes such as PPF.

There is, however, a flipside. A shift to the new tax regime effectively disincentivises investments in social security measures such as mediclaim and savings schemes with a lock-in period like PPF. While this would provide more flexibility to taxpayer and put more money in hand, it can create tall challenges if he/she does not find ways to save for rainy days and boost the social security net.