Old VS New INCOME TAX : Which is better & for whom?

Old VS New Income Tax Regime

KAKALI DAS

A lot happened already in January – boycott Pathaan, BBC documentary and Hindenburg report on Adani – now who will come on top – that remains to be seen. But, February started with “the budget” – that came with an increased rebate limit. Is it truly a relief or another jumla?

Old versus new tax regime debate is on – and countrywide accountants are busy calculating what will be the best for an average person – old or new?

Before knowing about your income tax – what is the truth of Govt’s income?  Where does Govt. collect money from? 58% from tax, 34% from borrowing, 6% from selling Govt. property (like Air India) and 2% from non-debt capital receipt – this is the Govt’s source of income. But, why do you need to know about it? Because only then it will clear the expenditure by the Govt and so on.

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Govt. Expenditure

• Interest payments – 20%
• States’ shares of taxes – 18%
• Central sector schemes like, Pradhan Mantri Awas Yojana, Ayushman Bharat, Atmanirbhar Bharat, Digital Mission etc. – 17%
• Centrally sponsored schemes like, Krishi Vikas Yojana, Sarva Shiksha Abhiyan, Rural Health Mission, etc. – 9%
• Finance Commission Transfers – 9%
• Defence – 8%
• Other Expenditure – 8%
• Subsidies – 7%
• Pension – 4%

This is the overall expenditure of government. You can now compare the income sources with its expenditure! Now, when expenditure is more than income, the Govt. is under fiscal deficit. Deficit is indication of more debt that may be taken to bridge the gap.

During pandemic, the deficit reached 9.3% of GDP, currently the deficit has fallen to 6.4% of GDP, and now, the target of the govt. is 4 to 4.5% of GDP. Government assures that stability will be achieved in coming years. Being aware of these numbers may have helped you understand the current financial situation – Govt. needs money, but 2024 elections are close and this was the last budget before that.

Nirmala Sitharaman’s decision is a gift to people, and it doesn’t increase deficit – question is will you like the gift or not. The decision elated godi media, shocked the opposition and confused the middle class.

Minimum slab limit increased from 2.5 lakh to 3 lakh in old tax regime. Whereas, in new tax regime, limit was increased to 7 lakh and a standard deduction of Rs50,000. Sounds good – 7 lakh and no tax – it was applauded in the parliament. The middle class sitting at home was happy too. So, finally, is it a masterstroke that benefits people? Or is there a catch?

New tax regime is to be made default from now on – unless we specify using old regime. New tax regime was introduced in 2020-2021, but nobody paid attention to it. Now, the new tax regime is revamped – with increased limit and some deduction. A number of charts show that there will be lots to save now with this new regime. But, later it’s understood that old tax regime had several deduction options, like –

• Standard Deduction – Rs50,000
• 80C – Rs1,50,000
• 80D (Parents are Senior Citizens) – Rs75,000
• NPS – Rs50,000
• Home Loan – Rs2,00,000

If you are not investing anywhere, then new tax regime is suited best for you. But, those who have set financial goals and are investing, kindly continue reading this article. Those intellectuals who think about medical or life insurance, home loan, pension, etc. new regime won’t do them good, as shown by the Business Today chart. Let’s break it!

• If you make 16 lacs a year and not claiming deductions, then why not? You can claim 4 to 4.5 lac deduction from the mentioned amount. For the ones earning 16 lacs and above – new or old regime does not make a difference – either can be opted. There is no masterstroke.
• If you make from 10 lacs to 15 lacs a year, and claiming deductions, then old regime will be advantageous. It’s true that it is hard to claim all the deductions but it must be known.
• The most amount of confusion lies for the ones earning 7 to 10 lac a year. Vivek Kaul, writer, economist, has an important take – that new tax regime can be costly for those who opt for it at 7, 8, 9 lac. It won’t be easy to switch between tax regimes as you move on in life. The Govt. will make it difficult ahead. It’d be wise to opt for the old regime, save tax by claiming deductions – as they say, old is gold, as explained by Vivek.

For an instance, if your income is Rs8 lakh/year – 

• Old Tax Regime:

HRA – Rs1,25,000

Section 80c – Rs 50,000

LTA – Rs 25,000

Total Tax to be paid = Rs 32,500

• New Tax Regime:

Total Tax to be paid = Rs 35,000

There is not much of a difference in old vs new tax regime at income of 8 lakh. Moral of the story is, if you don’t invest much, new tax regime is fit for you. But many who invests will find old tax regime beneficial for their interests. Again, there are complications too – so you must calculate which tax regime suits you better, depending on your investments.

Now, let’s assume new tax regime is better and gives you more to save, but why is it still advised against it?

Why is New Tax Regime dangerous?

1. No incentive for Insurance Policy Holders – How many of us buy medical or life insurance by our own will? Insurance penetration is 3%. How many will buy insurance on their own?
2. No tax relief for Home Loan Customers – There is no benefit for this in new tax regime.
3. Equity Linked Savings Scheme (ELSS) mutual funds will lose charm – ELSS mutual fund is one you can get to be in habit of investing, can’t be withdrawn before 3 years, and you get a lump sum at the end. Now, there is not scope for investment in new regime, as it encourages spending.
4. Encourages spending, discourages investments – The govt. wants its citizens to splurge as much as they want – it has become like the app which keeps spending notification for food delivery – why save when you can spend!?
5. Spending will increase and GDP as a result, but is it sustainable? We used to fare better in recession as we had the habit of saving for rainy days. This good habit now may be forgotten. Earlier, investment was done for saving tax, but there was an availability of that option at least. Now, minimum slab tax has been increased. Instead of minimum slab, increased limit of 80C could do a lot good.

I admit, there sure are many irregularities too in the name of tax saving. Those scams will apparently stop in the new regime – but genuine investments may also lessen in number. Some who actually donated for tax benefit may stop. What will happen to tax saving firms?

Govt. wants to simplify tax – and that is good. In many countries the process is easy, as there are no sections, like 80C or 80D, and requirement of no calculator even. But, why is this tax simplicity in the income tax only? Why not simplify GST, corporate tax etc. too?  

Isn’t it like old wine in a new bottle? The tax is pretty much the same still, but under a new name ‘new tax regime.’ But, in order to save that much money, will your investments stop?

Hence, new tax regime is recommended only if you do not invest at all, and old regime is still beneficial considering all investments. Even if you want to opt for the new regime, still pay attention to your medical and life insurance, investments, etc. – recession may be on its way!

So, this is not a new masterstroke – just a new wrapping.

13-02-2023 [Images from different sources]

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