Full Version: Is the new tax regime good for you?
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Has the Budget 2020 left you more confused? The big question facing everyone is - ‘Am I going to pay less tax or more tax?’ Let’s unpack this for you.
What is the fuss all about?
The FM has given you two options. First option, you may choose to live under a rock and pay the same tax you paid last year, nothing changes if that’s what you want to do. Second option, the FM offered new tax rates if you are willing to give up all exemptions and deductions, think giving up HRA, LTA, EPF/PPF deduction, medical insurance deduction and so on.

Help me choose
Let’s understand this step by step -

Case 1
Your total income is exactly the same in old regime and in the new regime
Considering no deduction or exemption in either of the regimes. Basically comparing apples to apples. In such a case, no matter what your income level is, you will save tax in the new regime>. At Rs 7.5L you will save Rs 26,000, at Rs 10L you will save Rs 39,000 by opting for the new regime. If your total income is Rs 15L or more, you will save Rs 78,000.

Case 2
You claim the standard deduction of Rs 50,000 and exhaust 80C limit (of Rs 1.5L)
In the second case, consider the more realistic scenario, where you claim Rs 50,000 of standard deduction (automatically allowed to the salaried and the pensioners) and manage to exhaust full Rs 1.5L limit of 80C. If you do this at a total income of Rs 7.5L and Rs 10L, you will pay more tax in the new regime. Though it may be really difficult to be able to fully exhaust 80C when you are at Rs 7.5L (we’ll solve this for you in Case 3).

At Rs 12.5L and at Rs 15L, by claiming standard deduction and exhausting the full Rs 1.5L limit of 80C, you will still pay less tax in the new regime. Therefore, at high-income levels, even though you may claim the standard deduction and exhaust 80C, it won’t be enough, the new regime will be more beneficial.
Case 3
Your break-even point - how to benefit from the old regime
How much do you really need to do to make sure that your taxes are the same in the old and in the new regime? We are calling this the break-even point. The way to understand this is - if you can cross this break-even point with exemptions and deductions, staying in the old regime will be beneficial. Cross the break-even points below to benefit more.

Income Level
Standard Deduction
Additional deduction required
At Rs 7.5L
At Rs 10L
At Rs 12.5L
At Rs 15L

How to read this table? Firstly, the standard deduction is allowed to all salaried employees, so that’s a given. If you can further reduce your taxable income by Rs 75,000 or more, you can benefit from the old regime. Similarly, at Rs 10L, you need an additional deduction of Rs 1,37,500 or more, to benefit from the old regime. This additional deduction can be done by a mix of HRA, 80C, LTA etc.

Article courtesy-cleartax