The Default Choice Isn't Always the Best
Since the financial year 2023-24, the new income tax regime has been set as the default option for all taxpayers. This means if you don't make an active choice, your taxes will be calculated based on its rules. The main appeal of the new regime is its simpler
structure and lower tax rates for certain income brackets. However, this simplicity comes at a cost: it eliminates most of the popular tax deductions and exemptions that salaried employees have used for decades to lower their taxable income. The old regime, while having slightly higher tax rates, allows you to claim over 70 different exemptions and deductions. For a young worker, especially one who pays rent or is starting to invest, these deductions can make a huge difference. The key is to not just accept the default but to compare which regime leaves more money in your pocket.
List Your Potential Deductions
Before you can compare, you need a clear picture of the deductions you are eligible for under the old regime. For most young, salaried individuals, the most significant ones are House Rent Allowance (HRA) and deductions under Section 80C. HRA allows you to claim an exemption for the rent you pay, which is a major expense for many living in cities. Section 80C is a basket of investments and expenses with a combined deduction limit of ₹1.5 lakh. This includes contributions to your Employees' Provident Fund (EPF), Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), life insurance premiums, and even the principal repayment of a home loan. Other common deductions include those for health insurance premiums (Section 80D) and interest on education loans (Section 80E). Make a list of all your applicable deductions and the total amount you can claim.
Doing the Math: A Tale of Two Incomes
The next step is to calculate your taxable income under both scenarios. In the new regime, the calculation is straightforward: from your gross salary, you can only subtract the standard deduction (currently ₹50,000). The remaining amount is your taxable income. For the old regime, the calculation has more steps. Start with your gross salary and subtract the standard deduction of ₹50,000. Then, subtract your HRA exemption and the sum of all your other deductions (like the full ₹1.5 lakh under 80C, your 80D claim, etc.). The final figure is your taxable income under the old regime. You will notice that your taxable income under the old regime is significantly lower if you have substantial deductions.
Applying the Slabs and Finding Your Breakeven Point
Once you have two different taxable income figures, apply the respective tax slabs to each. The old regime taxes income above ₹2.5 lakh, with rates of 5%, 20%, and 30%. The new regime has different slabs, starting with a 5% tax on income between ₹3 lakh and ₹7 lakh. After calculating the total tax liability (including cess) for both, you will see a clear winner. As a general rule, a 'breakeven point' emerges. This is the total amount of deductions at which the tax liability under both regimes becomes equal. For instance, some analysts suggest that for an income of around ₹15 lakh, if your total claimed deductions exceed roughly ₹3.75 lakh, the old regime becomes more beneficial. For those with lower incomes, this breakeven point will be lower. This is why a personal calculation is essential, as everyone's financial situation is unique.
