Personal Income Tax – which regime should I go for, New or Old?


As the economy slowly begins to start up and get back on its feet, it is the time of the year, post extensions, when companies require you to let them know what income deductions you will be availing of in the current financial year and the quantum of investments in various tax saving schemes. This year, however, there is an added dimension to this, you will have to also let your company know if you will be availing of the previous tax regime or the new one.

While this decision is entirely dependent on your ability and willingness to invest in tax-saving instruments as well as various deductions available to you, we are writing to give you some broad indications of which one may be suitable for you.

Below is a quick recap of the tax slabs in both the old and new regimes. The rows highlighted in grey in the new regime are the income slabs which are benefited on income tax versus the old regime. Also, important to remember that if you choose the old regime you can avail of various deductions, whereas you cannot avail of any deductions in the new regime.

Most availed deduction/exemptions in the old regime are as follows

  • Standard deduction (available by default to everyone)
  • Sec 80C – up to Rs 1.5L (normally taken care by the EPF contribution for employees, as also school tuition fee or principal repayment of house)
  • Sec 80D & Sec 80DD – Medical insurance Premium paid for self and Parents
  • HRA benefit
  • Home loan interest repaid


Let us look at which option seems beneficial under various scenarios.


You are able to avail of entire 80C and 80D medical benefit without investing in any further instruments

What we have noticed with a large part of our customers is EPF or NPS contributions take care of the entire Sec 80C limit. In a few cases where it is not so, the education tuition fees of children or principal repaid from home loan can cover up.

No one takes health insurance to save tax. It is supremely important to have a medical insurance to ensure that your financial goals are not de-railed thanks to an illness.   Most customers do have medical insurance and are able to claim a deduction of 25K for self and family. If you are paying the premium for senior citizen parents, you can get a further deduction of 50K.

Since you are not forced to invest any further money to save tax it normally makes sense to stay with old regime.


You have a home loan

If you have a home loan, it is a no-brainer to stick to the old regime, primarily because you will get home loan interest deduction upto 2L apart from availing 80C for principal repayment.


You are a senior citizen investing in PPF for 80C and have fixed deposits or Senior citizen saving scheme

If you are a senior citizen who has been investing in PPF for many years and are comfortable investing further and you hold substantial FDs or Senior Citizen Savings Scheme (SCSS) it would be beneficial to stick to the old regime. This is because you get deduction of Rs 50,000 on interest paid under section 80TTB. This is over and above 1.5L deductions under 80C for investments in PPF.

If you are wondering why a senior citizen will be investing in PPF, many of our customers use this as a tax-free estate planning device. They keep investing and leave it behind for their children. As part of asset allocation, they put some part of their debt monies into such schemes.


HRA deduction

If you are eligible for HRA deductions and can avail of deductions under 80C for your ongoing investments or expenses, it is an added reason to be in old regime.


If you are taking Voluntary Retirement and expect to get a compensation amount

Compensation upto Rs 5L received under voluntary retirement scheme is exempt from tax once in your life time. If you are choosing to avail of Voluntary retirement this year, you should stick with the old tax regime.

While the above are basic pointers, there are additional benefits available to you if you choose to invest Rs 50,000 in the NPS scheme, have an educational loan or plan to donate to recognised institutions, in all such cases the old regime is beneficial.

As you can see, I have highlighted many cases where the old regime is beneficial. You must be wondering why bring a new tax structure if it is not beneficial for most. The key to this is that you can claim deductions without making fresh investments in sub-optimal instruments only to avail of the tax deductions. Also, we have looked at the above primarily from a salaried employee’s perspective.

For self-employed or professionals where Sec 80C is not a given, they will need to invest money to avail of tax benefits. In many cases, the choice of investments will be at cross-purposes to their financial goals. In such cases it would be better to opt for new regime and invest your money in instruments of your choice which are aligned with your overall financial goals.

If you have already made the choice of tax regime as a salaried employee, you can change your mind at the time of filing your tax. This is not an option with non-salaried people. As mentioned earlier it is always a good idea to consult with your financial advisor/ tax consultant to get advice which is customised to your unique situation. However, the above pointers may help you understand the reasoning behind the choice.

Image credit: Gerd Altmann, Pixabay

Finwise is a personal finance solutions firm that helps both NRI and resident individuals and families plan for their financial goals, follow their passions and achieve financial independence.

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