New tax regime may be beneficial if you do this - Business2Business

The amount of tax you'll save by investing in a tax-saving financial product depends on two things: the tax bracket and the income tax regime you choose.

Starting with the 2020-2021 tax year, a person can continue with the old tax regime and can get benefit from common deductions under Section 80C, Section 80D, etc. of the Income Tax Law of 1961. Otherwise, you can choose the concessional tax regime without Usually available deductions or tax exemptions.

If you choose the old tax regime

If you choose the old tax regime, you will be asked to invest/spend a certain amount on specific tax-saving tools. Here's an example to help you understand how much tax you can save.

Suppose your total gross income for the current tax year 2020-21 is Rs 9.5 lakh. Invest 1.5 lakhs in the Public Provident Fund (PPF) to claim the deduction under Section 80C. By claiming a discount of Rs 1.5 Lakh, your total income will be reduced to Rs. 8 Lakh (Rs 9.5 -1.5 Lakh). Now your tax liability will be calculated at Rs 8 lakh.

By investing Rs 1.5 lakh in a PPF, you can save Rs 31,200 (including 4% cess) on taxes. If you had not invested Rs 1.5 lakh in a PPF account, your tax liability would have been Rs 1.06,600 calculated on the taxable income of Rs 9.5 lakh. By claiming a deduction of Rs 1.5 lakh, your tax liability is reduced to Rs 75,400 (on taxable income Rs. 8 lakh) hence a tax savings of Rs 31,200 lakh.

The tax was provided for each Rs 1.5 lakh tax-saving deduction claimed under Section 80c

Income tax rates

Tax saved (Rs)

At 5 percent

7800

At 20 percent

31200

At 30 percent

46800

Alternatively, suppose your total gross income for the fiscal year 2020-21 is Rs 10.5 lakh. By claiming a deduction of Rs 1.5 lakh under Section 80c, the taxable net income decreases to Rs 9 lakh. By claiming the deduction, you will now be in the 20% tax bracket instead of the 30% bracket.

The amount of tax you saved is Rs 36,400 (including 4% tax). Your tax liability of Rs 1,32,600 on the income of Rs 10.5 lakh drops to Rs 96,200.

Income tax slabs under the old regime for the fiscal year 2020-2021

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For people under the age of 60

Taxable income slabs

Income tax rates and cess

Up to Rs 2.5 lakh

Nil

Rs 2,50,001 to Rs 5,00,000

5% of (Total income minus Rs 2,50,000) + 4% cess

Rs 5,00,001 to Rs 10,00,000

Rs 12,500 + 20% of (Total income minus Rs 5,00,000) + 4% cess

Rs 10,00,001 and above

Rs 1,12,500 + 30% of (Total income minus Rs 10,00,000) + 4% cess


For residents between the ages of 60 and 80 (Senior citizens)

Taxable income slabs

Income tax rates and cess

Up to Rs 3 lakh

Nil

Rs 3,00,001 to Rs 5,00,000

5% of (Total income minus Rs 3,00,000) + 4% cess

Rs 5,00,001 to Rs 10,00,000

Rs 10,000 + 20% of (Total income minus Rs 5,00,000) + 4% cess

Rs 10,00,001 and above

Rs 1,10,000 + 30% of (Total income minus Rs 10,00,000) + 4% cess


For resident individuals of age 80 and above (Super Senior Citizen)

Taxable income slabs

Income tax rates and cess

Up to Rs 5 lakh

Nil

Rs 5,00,001 to Rs 10,00,000

20% of (Total income minus Rs 5,00,000) + 4% cess

Rs 10,00,001 and above

Rs 1,00,000 + 30% of (Total income minus Rs 10,00,000) + 4% cess


There are several investment/spending options that are part of the Section 80C basket. Some of the commonly used options are the Employee Provident Fund (EPF), PPF, Equity Linked Savings System (ELSS), and fixed 5-year tax savings fixed deposits that are held at the bank or post office. Some expenses such as principal home loan repayment, school fees, premiums paid on the life insurance policy, etc. are also eligible for deduction under Section 80C within the maximum of Rs 1.5 lakh.

Options other than Section 80c

In addition to Section 80c, there are several sections of the Income Tax Act that can help you save taxes. For example, Section 80D offers a discount on health insurance premiums paid by yourself, your spouse, dependent children, and your parents.

A maximum deduction of Rs 25,000 can be claimed for the health insurance premium for one's spouse and dependent children if the oldest is under 60 years of age.

Also, you can claim a deduction on the health insurance premiums paid to your parents. If your parents are under the age of 60, you can claim an additional deduction of Rs 25,000.

On the other hand, if your parents are over 60, the maximum deduction you can claim is Rs 50,000 in a financial year. Similarly, if you and your parents are over 60, you can claim a total deduction of Rs 1 lakh (Rs 50,000 + Rs 50,000) in a tax year.

Suppose you are less than 60 years old and your parents are senior citizens, that is, 60 years old or older, you can claim a deduction of 75,000 rupees (25,000 rupees + 50,000 rupees) in the tax year. So if your net taxable income (total income minus all claimed deductions) is within the 5 percent tax rate, you can save a tax of Rs 3,900 (tax included).

The tax is provided by the health insurance premium paid  for you and your parents

Income tax rates

Tax saved (Rs)

At 5 per cent

3900

At 20 per cent

15,600

At 30 per cent

23,400


(Tax savings are inclusive of cess at 4 percent)

* Self, wife, children under 60 years old, and senior citizen parents.

Also, Section 80E of the Income Tax Act offers a deduction on the interest paid on an educational loan with no cash limit. Section 24 offers a deduction on interest paid up to Rs 2 lakh in a fiscal year on a home loan obtained.

What happens if I choose a new tax regime?

If you choose the new tax system, you will not be able to claim the previously shared deductions. However, your tax liability will be calculated based on the lower tax rates.

Income tax slabs under the new tax system for the fiscal year 2020-2021

Income tax slabs

Tax rate

Up to Rs 2.5 lakh

Nil

From Rs 2,50,001 to Rs 5,00,000

5%

From Rs 5,00,001 to Rs 7,50,000

10%

From Rs 7,50,001 to Rs 10,00,000

15%

From Rs 10,00,001 to Rs 12,50,000

20%

From Rs 12,50,001 to 15,00,000

25%

Above Rs 15,00,000

30%


From the example above, if your total gross income is Rs 9.5 lakh and you choose the new tax system, your tax liability will be Rs 70,200.

Total tax liability under both tax regimes for a total gross income of Rs 9.5 lakh

Gross total income with the tax regime

Tax liability (Rs)

Old tax regime with section 80C deduction of Rs 1.5 lakh

75,400

Old tax regime without section 80C deduction

1,06,600

New tax regime at lower concessional tax rates

70,200


Therefore, from the table above, it can be seen that although Rs 1.5 lakh is deducted under Section 80c in the old tax system, the individual is better off in the new tax system. However, if a person qualifies to claim any other deduction or exemption, the tax liability can be further reduced under the old tax system. Therefore, the tax liability in the new and old tax systems should be compared before making actual investments.

Also Read: SBI mega property e-auction across India starts today: Key things to know

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