Tax Savings | Why is the Old Regime Attractive for Taxpayers in the Income Tax Bracket?

In this article, we will delve into:

i) Introduction

ii) The key pointers that determine which income tax regime offers greater tax savings

iii) Why the old tax regime benefits individuals eligible for substantial tax deductions

iv) Factors that continue to make the old tax regime appealing to numerous taxpayers

v) Conclusion

Introduction

You have to select between the old and new tax regimes in order to compute taxes if your income is classified as taxable. The old tax system allows you to claim higher income tax exemptions and deductions, which reduce your taxable income and, consequently, your net tax liability, even though the income tax rates in the new tax regime are comparatively lower. If they qualify for certain deductions and exemptions, many taxpayers may find that the previous tax system is a good way to lower their overall tax burden. Here, we'll explain when the previous tax system will benefit you.

The key pointers that determine which income tax regime offers greater tax savings

If your income is Rs 7 lakh or less, you will not be required to pay any taxes under the new tax regime. If you are employed, you will also receive a standard deduction of Rs 50,000. As a result, you will not be required to pay tax on your taxable income up to Rs 7.5 lakh. You will be required to pay income tax on the full amount, albeit at a reduced rate, if your taxable income exceeds Rs 7.5 lakh.

Although there are fewer deductions and exemptions under the concessional/new tax regime, the tax rates are lower. If they want to forgo the majority of the deductions that were offered under the previous tax system, taxpayers can choose to use this regime. The new tax law prohibits taxpayers from claiming deductions under a number of sections, including 24C, 80D, and 80C. Nonetheless, there are certain deductions available, like the standard deduction and family pension.

Therefore, if your taxable income is more than Rs 7.5 lakh, it makes sense to compare your tax liability under the old and new tax regimes. In terms of tax-saving opportunities, the old and new tax regimes in India can be compared according to several criteria, such as individual income levels, allowable deductions, investment preferences, liquidity, need for emergency funding, etc.

Why the old tax regime benefits individuals eligible for substantial tax deductions

Under the old tax system, there were numerous exemptions and deductions that could be exercised. Which tax regime is better for you will depend on the deductions that are claimed. By increasing the number of deductions that can be claimed, the likelihood of saving more tax under the old tax regime increases; otherwise, the new tax regime may be better.

Factors that continue to make the old tax regime appealing to numerous taxpayers

1) The old tax regime provides a dual benefit of tax savings and investment, allowing you to make regular investments and benefit from tax savings. The previous tax system does provide numerous opportunities for tax savings and the new tax regime does not provide incentives to investors for investments that save taxes. In that regard, the previous tax system compelled individuals to save, albeit to reduce taxes. A deduction of up to Rs 1.5 lakh is permissible for eligible investments under Section 80C. Due to the substantial tax rate associated with the highest tax bracket in India, any deductions claimed under the old tax regime can generate substantial tax savings for individuals in this bracket. For instance, Section 80C permits deductions of up to Rs 1.5 lakh for investments in specific schemes, such as PPF or ELSS.

2) Paying the premium for an insurance policy results in a deduction benefit in the old tax regime. For a maximum of Rs 1.5 lakh, you are eligible to claim a deduction on your life insurance premium payment under Section 80C. You are eligible to claim a deduction of up to Rs 25,000 for the premium you pay for a health insurance policy that covers yourself, your spouse, and your children if you are under the age of 60. Additionally, up to Rs 50,000 may be claimed by paying the premium for a health insurance policy purchased for senior citizen parents.

3) The old tax regime provides a private sector employee with the opportunity to invest in NPS through their employer, thereby reducing their taxable salary. This alternative is accessible in both the old and new tax regimes. Nevertheless, the old tax regime provides a more extensive opportunity for tax savings. Your employer has the option to deduct up to 10% of your basic salary and contribute it to your NPS. This will reduce your taxable income and, as a result, save you taxes.

4) In the majority of cases, the Rs 1.5 lakh limit under Section 80C is exhausted by the repayment of home loan principal, EPF contributions, and education fees for children without investing a single penny in NPS. This is the point at which an additional Rs 50,000 investment option under Section 80CCD (1B) provides a genuine opportunity to invest in NPS, in addition to the Rs 1.5 lakh limit, and to benefit from an income tax deduction under the old regime.

5) The interest rate on a home loan is among the lowest in retail loans, making it one of the least expensive borrowing options. This enables a significant number of individuals to acquire a residence with only a down payment and finance the remaining payments through a home loan. A home loan borrower is eligible to claim a deduction of up to Rs 2 lakh per financial year under Section 24 (b) for interest payments under the old system. This is applicable to both self-occupied and rented properties.

6) Donations to eligible institutions may be eligible for deductions under Section 80G. Under Section 80TTA, you are eligible to claim a deduction of Rs 10,000 for the interest earned on savings bank accounts. Senior citizens are eligible to receive a deduction of up to Rs 50,000 on the interest earned on specified deposits. If you have an education loan, you are eligible to claim a deduction for the entire amount of interest you pay. The list of deductions and exemptions under the old tax regime is extensive and is applicable to a limited number of taxpayers who satisfy specific criteria.

7) Under the old regime, house rent allowance (HRA) is a significant tax savings opportunity for individuals who reside in rented accommodations and receive it as a component of their salary. Individuals in a metropolitan area are eligible to receive up to 50% of their salary as HRA, which can significantly reduce their taxable income and, in turn, their tax burden. The HRA benefit may be available to you in certain circumstances, even if you have a home loan, provided that the property is located in a different city and is rented. In the same vein, if you receive a leave travel allowance as a component of your salary, you can further reduce your expenses by claiming this exemption for the money you spend on travel.

Conclusion

When it comes to taxes, every penny that can be saved from your hard-earned money is a penny earned well. Therefore, if you are eligible for a significant number of exemptions and deductions, it may be advantageous to choose the old tax system to decrease your tax liability. The old tax regime yields greater tax savings for individuals with substantial deductions under various sections of the Income Tax Act than the new regime.

Consider the new tax regime if your circumstances do not qualify you for such deductions, as it may enable you to save taxes on higher income. The tax structure is simplified under the new tax regime, which reduces the tax burden for many taxpayers, particularly those who do not have considerable deductions under the old regime or prefer a simpler tax calculation process.