As new tax regime beckons, should you switch?

If you currently use all exemptions and deductions, you may be better off with the existing regime

The new personal income tax regime (‘PIT’) has become the talk of town. Taxpayers have started reviewing compensation structures and exemptions/deductions being availed to evaluate whether they should opt for the new PIT regime or stay in the existing one.

One such discussion took place in the Sharma household. The Sharma household consists of Mr. Raj (son, a software engineer), Ms. Sneha (daughter, recently graduated and working in a BPO in Hyderabad), Ms. Leena (mother, housewife) and Mr. Sharma, a retired bank officer. Mr. Sharma was elated that the Finance Minister had proposed the new PIT regime, wherein lower tax rates are prescribed. He showed his family, the income tax slab and rates applicable (Table 1)

Hearing this, Mr. Raj sought to check how much tax he would save, if he opted for the new PIT regime. Mr. Raj earns a gross salary of ₹55 lakh per annum and also claims several exemptions/deductions.

Mr. Sharma said in order to opt for the new PIT regime, Mr. Raj has to forego the following exemptions/ deductions and make a choice at the time of filing returns, viz. house rent allowance, leave travel concession, standard deduction of ₹50,000 and professional tax paid; allowances under section 10 (14), any allowance granted to meet the cost of travel on tour or on transfer; and per-diem ₹1,500 per minor child; interest paid on loan taken for self-occupied house property or vacant property; chapter VIA deductions that includes Section 80C (investments in LIC, ULIP, ELSS, tuition fee, provident fund, public provident fund, sukanya samriddhi yojana, tax-saving term deposit, national savings certificate, principal repayment of home loan); contribution to national pension scheme, except for employer contribution; medical insurance premium or medical expenditure or preventive health check-up expenditure paid for self and family; medical expenditure / insurance on a dependent who is a person with disability or for specified disease, contribution to national pension scheme; interest on educational loan; donations; interest on affordable home loan; interest on savings account/ term deposit; rent paid, where housing allowance is not provided by employer; free food and beverage provided by employer through vouchers.

Mr. Sharma further indicated that while the above exemptions were being taken away, the following exemptions continued — terminal benefits like provident fund, national pension scheme withdrawal; voluntary retirement compensation; Retrenchment compensation; gratuity; leave encashment, etc

Ms. Sneha said she had not availed most of the above exemptions and deductions and hence the new regime may be beneficial to her. Ms. Leena said, “Let’s make a comparison of the tax payable under the old and new regimes to determine whether the same is beneficial or not.” (Table 2)

Tax savings

In the table, Mr. Sharma and Ms. Sneha were glad to see tax savings of ₹28,600 and ₹14,196 respectively. Mr. Raj found he would pay additional tax of ₹2,60,365 if he opted for the new regime, primarily due to lack of exemptions / deductions and levy of surcharge (10%).

Mr. Sharma was also happy to know that he did not have to invest in tax-saving instruments, which means higher cash is available for spending, in addition to the tax saved! Ms. Sneha was also happy that she did not have to provide details of exemptions and deductions.

So, the option is a mixed bag. Taxpayers who do not plan or do not exhaust all avenues to plan taxes, may benefit from the new regime. Those who avail all exemptions and deductions stand to lose if they opt to switch over.

(The author is Tax Director – People Advisory Services, EY India. With inputs from Abhishek Daga, senior tax professional, EY India. Views are personal)

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