New income tax system: is the reduced tax rate option right for you?


There is a lot of confusion about the new tax regime. People are not able to decide which one to go for. The new tax regime is available only to individuals as well as to a HUF whether you are resident or non-resident and is optional. The new tax regime gives you preferential rates up to a total taxable income of Rs. 15 lakhs with tax brackets of 5%, 10%, 15%, 20% and 25% on income brackets progressing by 2 .50 lakhs from basic exemption of Rs. 2.50 lakhs. In the event that one wishes to take advantage of the reduced rates of tax slabs under the new tax regime in place of the existing tax slabs, one must waive various tax deductions and exemptions available under the old tax regime. .

As for employees, they are not entitled to major benefits such as lump sum deduction, rent allowance, travel leave assistance, etc. if they opt for the new tax regime. The retired elderly person will not be able to claim the standard pension deduction from the former employer as well as the post and bank interest deduction u/s 80TTB if you opt for the new tax regime.

Additionally, various deductions under both Chapter VIA and Section 80 C (composed of various items such as EPF, LIP, tuition, PPF, NSC, ELSS, home loan repayment, etc.), 80 CCD (1 ) and 80 CCD (1B) (for NPS) 80D (for health insurance premiums) 80 D for mediclaim, 80 G for donations, 80TTA for savings bank account interest, etc. will also not be available to taxpayers.

If you have borrowed money to buy a house or to repair the house which you claim to be self-employed, you are not eligible for the benefit of the deduction for interest paid which is available up to Rs. 2 million each year. You will also not be able to deduct the current loss as well as the loss carried over to the title of the main house from the current income if you change to a new plan. Not only are you not allowed to carry forward home ownership losses for rental properties.

The cumulative benefit of switching to a new tax regime is around Rs. 75,000/- plus 4% cess if your total income is Rs. 15,000,000. As many exemptions and deductions can be claimed and the composition of these tax benefits varies from person to person, a ready-made answer cannot be given as to which plan is right for you. However, when it comes to the tax benefits that the majority of taxpayers have to forego, the benefits available with the existing regime outweigh the benefits of the lower rates available under the new regime, particularly in the case of employees and those who took out a home loan.

How to exercise the option to opt for the new regime and switch between the old and the new regime

For those with no business income, they must exercise the option annually by filing Form 10IE with the ITR, but before the ITR filing due date. i.e. July 31 and the option once exercised for a given year cannot be changed if you wish to file a revised return. So please consider all income, exemptions and deductions when opting into the plan for any given year. Please note that opting for the new tax regime with your employer is not considered to be exercising the option with regard to income tax legislation. The exercise of the option with the employer has a limited purpose and you can decide to opt for an alternative plan when filing the ITR. Please ensure to deposit your ITR before the due date if you wish to opt for a new tax regime as the option is not available after the expiry of the due date. However, you can choose to remain in the old plan for one year and in the new plan the following year.

For those with business income, they must exercise the option once and for all by filing Form 10IE before the ITR filing due date, although the ITR can be filed later. Such a person can only opt out of the new tax regime once and then is not allowed to revert to the new tax regime unless there is no business income for that year. You should therefore be very careful when opting for a new tax regime if you have business income and should take into account the composition of the income not only of the years concerned, but also of all the years to come.

How does the diet work?

Let’s understand how the scheme works with examples. Almost all employees benefit either from the HRA for the rent paid, or have bought a house with a mortgage. Assuming that you have purchased a house with a home loan, you will not be able to avail the home loan benefits for interest and principal repayment of Rs. 3.50 lakhs together. After taking into account that you will also have to waive the claim for lump sum deduction of Rs. 50,000/- if you opt for the new scheme, you waive the full benefit of Rs. 4,00,000/- resulting in tax impact of Rs. 80,000 if you are in a 20% tax bracket and have an income between 5 lakhs and 10 lakhs. The net tax benefit lost is greater than the benefit of Rs. 62,500/- accruing to you under the new scheme. For those in a 30% tax bracket, the tax effect of the lost benefit at 30% would be 1.20 lakh compared to the benefit of Rs. 75,000/- resulting from the new scheme. We may also incorporate an exclusive benefit available in respect of NPS of Rs. 50,000/- available under Section 80 CCD(1B). Thus, in all likelihood, the new scheme is not attractive to an employee. An employee must calculate his final tax payable when filing the ITR and opt for the regime that helps him optimize his tax expenditure.

From the example above, it becomes clear that whether one is in a 20% or 30% tax bracket, the existing regime is better for one who takes all the basic deductions normally used by people. Consider an example where the person has an income of up to Rs. 7 lakhs and will have to pay a tax of Rs. 32,500/- if opting for a new scheme. However, if he is able to claim a deduction under Section 80 C for Rs. 1.50 lakhs and a deduction of Rs. 50,000/- under Section 80 CCD(1B) for NPS and reduce his total income below 5 lakhs, he will not have to pay tax by availing the u/s 87A refund up to Rs. 12,500/-. Thus, by investing two lakh rupees, one will be able to save Rs in tax. 32,500/- remaining under the old regime. However, this scheme will work for self-employed people who do not wish to save money to make eligible investments to claim various deductions.

to summarize Balwant Jain is a tax and investment expert and can be contacted at [email protected] and @jainbalwant on Twitter.

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