Here’s a question a reader sent in:
I have a question – what is the difference between the new scheme and the old scheme? My investment advisor needs me to check what scheme I’m on and I don’t know how to find out. What are the pros and cons of each?
Anon
What is the new Income Tax Regime?
First things first: What is the new income tax regime, even? The new tax regime introduced by the Indian government is a simpler, more straightforward income tax scheme that offers a lower tax rate to taxpayers if they forego their deductions and exemptions. So you don’t have to bend over backwards to see if you’ve ticked all the ‘tax saving’ boxes and can instead just pay a flat – and marginally lower – rate of tax on your income.
As an obvious consequence, the old scheme is now known as the ‘Old Income Tax Regime’. This regime allows taxpayers to continue availing of all the deductions and exemptions they used to.
Here are some pros and cons of the new regime versus the old:
While the new income tax regime sounds simple and enticing, there are both pros and cons to it:
PROS OF THE NEW SCHEME:
- Lower tax rate: The new tax regime offers a lower tax rate as compared to the old scheme, which can result in higher take-home pay for taxpayers.
- Simpler, easier to understand form: The new tax regime is simpler and easier to understand as it does away with various deductions and exemptions, which can be complicated and time-consuming. The income tax form you’ve to fill out is also more straightforward.
- Invest how you want: The biggest advantage of this scheme is that it allows you to invest money the way you want to, versus being coaxed into dime a dozen ‘tax saving’ schemes which may have never made sense for you in the first place. The new tax scheme gives you greater agency over your investments.
CONS OF THE NEW SCHEME:
- No deductions: The new tax regime does not allow taxpayers to claim deductions, which can result in a higher tax liability for taxpayers who were availing of various deductions in the old regime. So if you’ve already been taking advantage of these deductions – let’s say you’ve invested in some long-term insurance schemes for example, or taken a home loan – the new scheme is probably not for you.
- No carry forward of losses: Under the new regime, taxpayers cannot carry forward losses from previous years, which can be a disadvantage for taxpayers who have incurred losses in the past.
Who should pick the new income tax regime?
In many ways, the new tax regime is built for first-time earners. If you’ve just started earning, likely, you’ve not made too many ‘tax saving’ investments. The new regime also offers you a lower tax rate, which results in higher take-home pay. Finally, the new regime is also very simple to understand so if you’re starting out, this is a great way to be more confident about your taxes and take charge of your finances.
Who should stick with the old income tax regime?
If you have substantial deductions and exemptions like insurance investments, health insurance, home loan interest, tuition fees, medical expenses etc., you should stick with the old tax regime since you can claim these deductions. If you’re also investing in the equity markets or have incurred capital losses, the old scheme is more advantageous since it allows you to carry these losses forward and set them off against future profits.
The decision to opt for the new or old income tax regime depends on individual circumstances and financial goals. As always, you should consult a professional to determine which scheme is best suited for you.
How To Find Out Which Income Tax Scheme You’ve Opted For
Finally, the easiest way to find out which scheme you’ve opted for is to look at your income tax return’s form (you can login to your income tax account -> view filed returns -> download form). The section A20/a2 will reveal which scheme you’ve opted for.
This is a representative screenshot
Alternatively, if you remember using the Section 80 deductions, you’ve likely opted for the old income tax regime.
I hope you found this useful! Got a question? Don’t hesitate to ask.
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