Which Tax Regime to choose for Individual

Income Tax Slab Rates, this term is known to all of us, and I’m not going to be wrong if I say our minds are roaming around this word, right, I suppose. It is clear to us that there is a need to know basics of income tax as one need to pay taxes accordingly to India’s government.

Indeed, a new tax structure with a lower slab rate was implemented by India’s Government in 2020 to reduce the burden on standard taxpayers. This move aimed to provide taxpayers with relief and raise their net disposable income to improve overall demand. So, after this was implemented, the taxpayers listed two choices below, as per which they could choose to pay taxes.

1. Exercise the old tax regime and pay taxes as per the below-mentioned rate:

Particulars	Rate
Upto  2,50,000	Nil
2,50,001 to  5,00,000	5%
5,00,001 to  10,00,000	20%
2,50,000	30%
Senior Citizen (60<Age<80)	Rate
Upto  3,00,000	Nil
3,00,001 to  5,00,000	5%
5,00,001 to  10,00,000	20%
10,00,000	30%
Super Senior Citizen (Age >80)	Rate
Upto  5,00,000	Nil
5,00,001 to  10,00,00	20%
10,00,001	30%

Under the old income tax slab, individual, senior citizen, and super senior citizen rates are distinct. Deductibles and exemption under the Income Tax Act, 1961, which taxpayers can use from their taxable income, benefit this current tax regime.

2. Exercise the new slab rate and pay taxes as per below mentioned rate

GOI expected greater acceptance of the same among taxpayers when declaring the new tax regime, but that did not happen due to uncertainty about “what to choose?”

The slab rate for all assessee groups is similar in the new tax regime, but public acceptance is still not high. You would think, at first instance, that if the new tax system has a lower tax rate, why has it not picked up the way it was expected?

As, for each type of individual, the tax rate in the new tax scheme is equivalent and lower, taxpayers will not, except a deduction provided for in section 80CCD(2) “Employer contribution for an employee under notified pension plan” or in section 80JJAA (‘New Employment’).

So, now the taxpayer is in a real dilemma about what alternative to use?

Here are the three examples to help you understand better. In these examples, we use the two schemes to measure tax liability.

Ex: – 1) A 45-year-old man with a total yearly income of 15,00,000. The qualified exemption he could say amounted to Lets by using both the tax regime and measuring the tax liability on him.

Particular	Amount
Gross Total Income	15,00,000
Less: -Deduction	2,50,000
Taxable Income	12,50,000
Tax Payable 2,50,000 to 500,000  – 12,500 5,00,001 to 10,00,000  – 1,00,000 Above 10,00,000 – 75,000 (2,50,000*30%)	1,87,500
Cess	7,500
Total tax Payable	1,95,000

Particular	Amount
Gross Total Income	15,00,000
Les: – Deduction	0
Taxable Income	15,00,000
Tax Payable 2,50,000 to 5,00,000  – 12,500 5,00,001 to 7,50,000   – 25,000 7,50,001 to 10,00,000  -37,500 10,00,001 to 12,50,001  -50,000 ,50,001 to 15,00,000  -62,500 (250,000*25%)	1,87,500
Cess	7,500
Total Tax Payable	1,95,000

Ex: – 2) An individual is 45 years of age with a gross annual income of 13,50,000. The qualified exemption that he can claim is equal to Using both the tax regime to measure tax liability on him.

Particular	Amount
Gross Total Income	13,50,000
Less: -Deduction	2,50,000
Taxable Income	11,00,000
Tax Payable 2,50,000 to 5,00,000  – 12,500 5,00,001 to 10,00,000  – 1,00,000 Above Rs. 10,00,000 – 30,000 (1,00,000*30%)	1,42,500
Cess	5,700
Total Tax Payable	1,48,200

–

Particular	Amount
Gross Total Income	13,50,000
Les: – Deduction	0
Taxable Income	13,50,000
Tax Payable 2,50,000 to 5,00,000 – 12,500 5,00,001 to 7,50,000 – 25,000 7,50,001 to 10,00,000  -37,500 10,00,001 to 12,50,000  -50,000 12,50,001 to 15,00,000  -62,500 (1,25,000* 25%)	1,50,000
Cess	6,000
Total Tax Payable	1,56,000

Ex: – 3) A person 45 with a gross annual income of 18,50,000. The qualified exemption he will assert shall be the amount. Let’s measure his tax liability by using the two tax systems.

Particular	Amount
Gross Total Income	18,50,000
Less: -Deduction	2,50,000
Taxable Income	16,00,000
Tax Payable 2,50,000 to 5,00,000  – 12,500 5,00,001 to 10,00,000  – 1,00,000 Above 10,00,000 – 180,000 (600,000*30%)	2,92,500
Cess	11,700
Total Tax Payable	3,04,200

Particular	Amount
Gross Total Income	18,50,000
Les: – Deduction	0
Taxable Income	18,50,000
Tax Payable 2,50,000 to 5,00,000  – 12,500 5,00,001 to 7,50,000  – 25,000 7,50,001 to 10,00,000  -37,500 10,00,001 to 12,50,000  -50,000 12,50,001 to 15,00,000  -62,500 Above 15,00,00– 1,05,000	2,92,500
Cess	11,700
Total Tax Payable	3,04,200

With the above examples, we evaluated that if an individual’s income is below 15,00,000, he can opt for the old tax regime. Whereas, if an individual’s income is 15,00,000 or > 15,00,000, he will be at break-even point by applying both the tax regime.

However, in situations where a person has business profits, the option is valid for all years after the choice has been exercised. Simultaneously, the person who has no business income is exercising the opportunity for each year.