Choosing your regime: old or new, what works for you?

Dont make a hasty decision when it comes to choosing your tax regime. Because once made, there is no going back!

The countdown to the final date to file your ITR has already started! 23 days from today is July 31, 2024—the last day you can file your income tax returns.

Well, that is not entirely true. You can file your ITR after this date as well, but you will have to pay a hefty penalty of Rs 5,000 for missing the deadline. But there’s another reason why July 31st assumes importance: it is indeed the LAST day you get to choose between the old and new tax regimes. Starting August 1st, the government will decide for you, and you’ll HAVE to go with the new tax regime.

But what is all this fuss about the old and new tax regimes? And why is it necessary to make the right choice here?

By choosing between the old and new regimes, you are essentially telling the government how you want to pay taxes (no escaping death and taxes!) on your hard-earned money. And you should exercise that right in a well-informed way.

Moreover, this is a decision you can only make ONCE a year while filing your ITR. Because the IT department thinks of you as Salman Khan, no less. Because ek baar jo aapne commitment kardi, uske baad to IT department bhi aapki agle saal hi sunega

With around 70 exemptions and deductions to help lower your taxability, the old regime works like a charm if you are diligent financially.

Exemptions and deductions help you get your taxable income down. Exemptions are excluded altogether while calculating your tax liability. Think HRA (house rent allowance). The next time you check your salary slip, you’ll notice HRA as part of your salary. If you are paying rent, a specific portion of your HRA is exempt from tax, depending on which city (metro or non-metro) you live in.

P.S. If you live with your parents, you can still save on HRA by paying rent to your parents.

Deductions, on the other hand, take away a certain amount to reduce your overall tax liability. So, if you’ve invested in equity-linked mutual funds (ELSS) during the year or are under 60 and have paid health insurance premiums, you can claim annual deductions of up to Rs 1,50,000 and Rs 25,000, respectively. But wait, you’ll have to prove that you’ve undertaken these transactions.

Other major deductions you should be aware of are:

• You can claim an annual deduction of Rs 2,00,000 for repayment of your home loan.

• Invested in ELSS, tax-saving FDs, NPS, PPF, EPF, or paid life insurance premiums? Collectively, you can claim a total of Rs. 1,50,000 annually for these.

• Have someone suffering from cancer, dementia, AIDS, or Parkinson's? If you are taking care of them, you can claim a deduction of up to Rs 40,000 annually.

• If you have invested in NPS (National Pension System) on your own accord as well, you can claim an additional deduction of upto Rs 50,000 (over and above the Rs 1,50,000 limit )

  

  There are 2 deductions that you get right away, without having to save or invest

• The first is standard deduction. The name says it all: you can minus this from your total salary right away without having to show any proofs, statements, or more. At present, this threshold is Rs 50,000 (The government is mulling over raising it to Rs 1 lakh, but only Nirmala Tai knows!)
  

• Deduction for preventive medical checkups. That should be your sign to visit the doctor for a regular checkup more often! The limit for this is Rs 5,000 annually.

Under the new tax regime, only the following deductions are up for claims (No ELSS, health insurance premium, PPF, EPF, etc.)

• Interest on housing loan on the self-occupied/vacant property

• Employee's self-contribution to NPS

• Donations to Political parties

• Standard deduction

  

  If you have an ongoing home/education loan, rent paid, or have major investments in ELSS, or PPF? Or on making deductions like HRA and LTA, you realize you can save on a substantial portion of your income, go for the old regime.

  
  But if you’re just starting, or your income is not very high, the new regime works well. Using this link, and this, you can also calculate your taxability under both regimes as well, before you make a choice. Here’s a quick snapshot of what each regime offers you:

A golden rule you should remember: As your income increases, so should your savings and investments. The best part about the old regime is that it allows you to save taxes on products essential to improving your financial health and future-be it insurance, NPS, ELSS, PPF, and more.

Update: I made a slight mistake while calculating LTCG in a previous blog post. Here’s what I have written

But let's say you defer this world tour by 3 years. You sell these units 2 years later and get Rs 12 lakh. Since you sold these units after 12 months, you’ll have to pay long-term capital gains tax, which will amount to Rs 60,000, leaving you with Rs 11,40,000 to travel the world. LTCG tax is applicable at 10% for equity mutual funds.

Your long-term capital gains would be Rs 7,00,000 (Rs 12,00,000-5,00,000). Since LTCG is applicable at10%, your LTCG tax would be Rs 70,000, and not Rs 60,000, leaving you with Rs 11,30,000 for the world tour

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