Need Multiple Cuts? old tax system is better

Asawa claims 1.5 lakh under section 80C, 2.4 lakh in House Rent Allowance (HRA), 50,000 investment in National Pension Scheme (NPS) (Section 80CCD(1B)) and 8,500 for medical insurance premium (Section 80D) as a deduction. for income 18 lakhs, he will still pay 22,050 less tax under the old regime after claiming the above deductions.

Like Asawa, for taxpayers with income above 15 lakh, the new regime (or the concessional tax regime, as it is also known) may not be beneficial even in its best form. peppermint The calculation shows that taxpayers whose income ranges from 15.5 Lakh onwards 5 crores and upwards to claim tax deductions and exemptions 4.25 lakh will pay more tax under the new system. for income from from 7 lakhs 15 lakhs, the taxpayers would need deductions and exemptions ranging from from 1 lakh 4.08 lakh to reduce the taxable income (see graphic).

Still, experts say it’s not difficult to achieve. “After increasing the tax exemption limit Many taxpayers with income up to 5 lakhs in 2019 8 lakh opted for aggressive tax saving schemes to reduce their taxable income 5 lakhs. Of course, this may have led some people to make investments they don’t need or don’t necessarily align with their goals, which I also don’t recommend. But, from a tax perspective, individuals can get the profit-taking limit if they have loans or are paying rent, combined with 80C and standard deduction,” said mutual fund distributor Amit Suri.

Besides this, there are deductions and exemptions like children’s tuition fees (under 80C), home and education loan interest portion, and HRA, which benefited taxpayers under the old regime. Take for example the case of Ankur Kaushik from Delhi. his income is 21 lakhs and he claims 4.5 lakh in HRA by paying rent to his mother and 1 lakh deduction on interest paid for education loan. “My HRA is enough incentive for me to stick with the old system. If the government removes the clause that you cannot claim HRA by paying rent to your parents, then I can think of moving to the new regime,” Kaushik said.

New System: Who Benefits?

Taxpayers having income up to 7 lakhs can go directly to the new regime as the tax exemption limit under section 87A has been raised 5 lakhs onwards 7 lakhs. Under the old regime, with taxpayers’ income 7 lakh deduction has to be claimed 2 lakh to bring down your net taxable income 5 lakh no-tax limit. Delhi based Lakshya Bakshi is excited “My income is 7.3 lakhs. I can switch to the new tax regime next year and not have to pay tax. 50,000 standard deduction was introduced in the concessional regime.

But, will he stop the tax-saving investments he is currently making? “I cannot control Employees’ Provident Fund (EPF) contributions as they are mandatory but I will hold my investments in Equity Linked Savings Schemes (ELSS). I invest directly in stocks, so I can use the free capital for that,” said Bakshi, 29.

Experts say that taxpayers moving to the new regime can have better control over their investments. “Tax planning should be incidental to overall financial planning but taxpayers ignore that. For example, in trying to exhaust all available deductions and exemptions, people often use up their entire disposable income and do not build an emergency fund, which may now be a priority,” said Rohit Shah, a registered investment advisor (RIA) and founder of make you rich,

Prableen Bajpai, Founder, Finfix Research, said that investors who can only save 1.5 -2 Lakhs annually, can now invest as per their needs instead of buying tax-saving instruments. However, he added that there is a flip side to this as well: The onus to save will now be on the taxpayer. “I strongly believe that long-term investments should be encouraged, especially for young earners, and 80C was a good starting point to inculcate the habit of savings,” Bajpai said.

Asawa is a case in point. “The 80C scheme motivated me to invest for the long term. If the money was liquid, I would have spent it.’ ,

Ishita Visaria, 37, in Mumbai shares a similar view. “Forced saving takes away the temptation to spend and it has worked very well for me. My investments in PPF (Public Provident Fund) and ELSS funds have grown tremendously so far. If it was left to me, I would not have saved the same way,” said Visaria, a chartered accountant.

The same can be said about medical insurance and pure life insurance, both of which offered tax incentives under the old regime. “The question is, how many people would buy insurance early in life if tax exemptions did not compel them to do so,” Suri said.

To be honest, gross mis-selling also happens in the name of tax saving. “Gradually as the new system is implemented, the menace of mis-selling of insurance will be curbed,” Bajpai said. 7 lakhs not just because they need not worry about tax planning, but also because it will improve their cash flow significantly. “For senior citizens, it is not easy to invest in tax-saving instruments just to be able to save 10,000- 15,000 in tax at the end of the year.

Sathya Sontanam contributed to this story.