TL-DR: Old Vs New tax slab — it’s probably time for you to declare whether you plan to switch income tax regimes. Here’s a simple way to figure out which will work better for you.

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Before we start, here’s the most important thing you need to know.

A change in the income tax slab regime is not set in stone. A salaried individual can switch between the old versus the new every year, based on needs and financial maturity.

Old Vs New Tax Slab: The Basics



Why the fuss?

In an effort to make tax-filing easier, government of India introduced a new tax regime in 2019.

What’s the major difference between Old Vs New Tax Slab?

In the old tax regime, it was possible for individuals to reduce how much they paid in taxes. This was with the help of deductions and exemptions.

But,

This obviously came with a lot of paperwork, since it involved providing proofs for many many of those deductions and exemptions.For salaried employees, it also meant a rather rarely-understood process of Declare-Invest-Prove. A lot of folks often ended up investing hastily into terrible investments at the last minute, just to save on taxes. And an even larger majority of folks never invested, or invested too little. So year-after-year, they ended up paying far more in taxes.

In the new tax regime, tax-filing is easier — much easier. There’s no submission of proofs, the tax rates are lower, and there’s no paperwork whatsoever. Sounds great really.

But,

There are no ways to save on taxes. About 70 deductions and exemptions which are available in the old tax regime, are missing in the new tax regime. So in some cases, choosing new tax regime might actually increase what you pay in taxes.







So how does one decide between Old Vs New Tax Slab?

There are four ways you can decide which regime you should pick. And they’re listed below in the order of their complexity.

Procedure 1: Based on life’s immediate, but major milestones

This is especially applicable for young folks fresh out of college.

If you’ve just joined the workforce, there’s a high likelihood that you haven’t settled down yet.

You may decide to take up a PG course — an MBA or an MS perhaps.Perhaps there’s a marriage on the cards — and Indian marriages are expensive affairs.You might even decide to quit and start something of your own.

But the old tax regime will force you to invest in tax-saving instruments — most of which lock up your money and make it inaccessible to you.

Tax-saving mutual funds lockup your money for 3 years (Longer if you’re doing an SIP)PPF will lock up your money for 15 years.NPS will lock up most of your money until retirement.Most ULIPS, pension plans, whole life plans etc.(which are not at all recommended BTW) will lock up your money for 3 or 5 years.

So, irrespective of age or milestones, if you do not like the idea of having your money locked up for such long periods, pick the new tax regime.

Procedure 2: Using a simple estimate

If you’re reasonably well aware of your finances, there’s a downright simple way to decide which tax regime you should pick this year.

If the combined value of your deductions and exemptions this year could exceed 2,50,000/-, you should pick the old tax regime.*

*Irrespective of what your income level

This combined sum of 2,50,000/- could be made up of deductions and exemptions like:

DEDUCTIONSEXEMPTIONSPPF/VPFLeave Travel Allowance (LTA)Your share of EPFHouse Rent Allowance(HRA)Life InsuranceFood CouponsTax-saving mutual funds(ELSS)Standard deductionNPSMobile and Internet reimbursementPrincipal component of home loanInterest component of home loan







Procedure 3: Take this quiz

This quiz provides a reasonably good estimate based on a weighted score of commonly availed tax incentives.

Do you have an ongoing home loan?

Yes No/Not applicable

If you have a home loan, does the annual interest paid on it exceed 2 lakhs? Yes No/Not Applicable

Do you plan to purchase an additional health insurance policy for you and your dependents?

Yes No

Do you plan to buy a term insurance policy?

Yes No

Do you have an ongoing education loan? [You can claim tax deduction on education loans.]

Yes No

Will your investments in equity mutual funds, PPF, EPF, VPF exceed a combined value of 1.2 lakhs this year? Yes No

Do you foresee a major expense coming up within the next three years? (Expensive post-graduation course, wedding, down payment for a house) Yes No

Do you plan to invest in NPS this year? Yes No

If you live in a rental property, will you be able to provide rental proofs? Yes No/Not Applicable

Do you plan to travel to a faraway destination this year? This could be a trip home or a vacation. Yes No



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Procedure 4: Use this simple calculator from Indian tax department

Income tax department has provided a quick calculator to help you assess. There are only two fields to input.

Your annual income &The combined value of deductions and exemptions you plan to take this year



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And that’s it.

I’m guessing by now you’ve got a fair idea of which regime to pick for this year.

Good luck!

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The post Old Vs New Tax Slab: Take The Quiz to Decide appeared first on The Moneyplanting Program on Employee Financial Wellness | Vinod Desai.