New income tax regime and old – an analysis for individuals

The Union Budget 2020 has provided for a entirely new income tax system for individual tax payers. This is in line with the support offered by the government to corporate tax payers.

The old income tax regime provided for compulsory investments in specified securities to save tax. Most of such investments are with a rider of minimum lock in period and reduced interest rates. Liquidity at the hands of tax payers also was an issue. In the case of senior citizens liquidity is foremost, and making them compulsorily invest for long term is also not a wise decision.

There were demands from all corners or expectations from individual tax payers for a flexible, more liquid and reduced taxation system. But for the government taking a decision to reduce tax rates and foregoing compulsory investment provisions is a tough. At present around 30% of the incomes are saved by the individual tax payers in the old regime and these money goes as medium term investments, which can be used for nation building. If the investment condition is foregone, the investments into sectors like infrastructure will be affected. So the new tax regime has be understood as a balancing act where investment is not affected but liquidity and flexibility at the hands of tax payers are ensured.

The union budget 2020 proposed an option for the tax payers to select a new tax regime, but with a cost. The cost here is that the tax payers need to forego most of the specified deductions under old tax regime. Deductions like standard deductions, section 80C deductions, housing loan deductions, interest on self occupied property are some which need to forgo. These may not be so attractive for a tax payer. A proper care should be taken while taking a decision to switch from old regime to new regime but considering all aspects.

The maximum savings under the new tax system is Rs. 75000/- if no investments are made. When the government came out with big changes for corporate tax payers, the reduction for all type of tax payers, but the changes for individual tax payers will be benefiting more at lower tax brackets. The maximum benefit also, as said earlier, limited to a small amount when we look from big tax payers angle. So a tax payer need to select the new tax regime by considering

. liquidity requirements

. Investment Opportunities available

. Probable returns on investment and tenure

. Savings requirement and plans.

The table below will show the benefits between the two taxation systems.

It is worth noting that the maximum benefit under the new taxation system is achieved at a taxable income of 15 Lakhs, and after that the benefits are stagnant.

But the new system have following benefits

Reduced tax rates

Lesser compliances and easy filing of taxes.

No compulsion to the investor for a long term investment, which may be against their investment habits and tastes.

Liquidity is assured.

Investment choices are made free, the tax payer can invest where ever he likes.

But for all the above he need to forego, most the of the deductions available to a tax payer under different provisions of income tax act.

We also need to look on to the existing tax regime to understand its benefits.

It creates a habit of investment for the future.

It increases the savings rate which in turn available for the growth of the nation.

The main drawback of old system was its list of specified investment instruments and related lock in period. Investor have no option to opt for any investment earning more other than the listed. The old system, when we compare with new system needs more documentations and filing the return without the support of a tax practitioner is tough.

So the decision to opt either the old or new is purely individualistic. The decision should be taken based on investment habits, horizon, risk appetite. The golden line here is if the tax payer is an individual tax payer have no income from business or profession, can decide every year which regime, old or new, they want to follow for that year. This benefit is not available to a tax payer who have income form business or profession, they will get only one chance in life time to go back.