Choosing between old and new tax slabs before paying taxes. Mains is 33 years old. Rakes works in an IT company and earns eight lakh rupees annually. He can learn about the new tax slab in the budget announcement. He now wants to know if the new tax slabs will be more beneficial to him or whether he should continue with the existing tax system.
See the table 'Tax Slabs: Old and new'. Paid employees can choose between one of the two systems and even switch between one financial year to the next. However, traders can only choose their tax slab once. They must continue with them after they do it.
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In the existing (old) tax system, one can claim various exemptions and rebates. On the other hand, the new tax slabs have been simplified. They do not have any concessions or exemptions for agricultural income except for a few miscellaneous like cashing in for retirement. Moreover, they have below tax rates.
Here is the tax that man has to pay under the existing tax system and under the new one.
Existing tax slab:
The existing tax system allows for many discounts and rebates that can reduce your taxable income. Rakes have the following:
Standard discount
A flat discount of Rs 50,000 is allowed for all salaried and pensioners.
Home Rent Allowance (HRA)
Rakes lives in a rented house for which he pays Rs 15,000 per month. The basic salary and HRA components of Rake’s annual salaries are Rs 4 lakh and Rs 2 lakh respectively. He can claim a tax deduction of Rs 1.4 lakh on HRA by producing a rent receipt, rent agreement, and his landlord's pan.
How to calculate your HRA
Your HRA entitlement should be at least one of the following:
H The original HRA was obtained
Rent pays minus 10% of basic rent basic salary and if there is any increment allowance (DA)
A 50% basic salary and DA (if any) if you live in a metro city, otherwise 40%
Provident fund discount
Four thousand rupees were deducted from Manish's salary every month. This leads to its mandatory provident-fund contribution, which is eligible for tax exemption under section 80C. If Rakes continues in the old regime, his taxable income of Rs 48,000 (4,000 × 12) can be further reduced Tax liability
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After considering the above discounts, Rake’s taxable income will be Rs 5,62,000. His tax will be Rs 25,896. Moreover, Rakes can less his tax burden to zero by investing above than Rs 62,000 U/s 80C. Section 80C has many investment opportunities such as Public Provident Fund, Five Year FD, National Savings Certificate, etc. Of these.
We recommend the Tax-Savings Mutual Fund, called the Equity-Linked Savings Scheme (ELSS), which is the best in terms of returns. Rakes can make a SIP of Rs 5,200 in a good tax-saving mutual fund throughout the financial year.
This will reduce the amount of his taxable income to Rs five lakh, after which he will be able to claim a rebate of Rs 12,500 under section 87A. This will reduce its tariff liability to zero.
The new tax slabs have simplified taxation and reduced tax rates in the absence of any rebates, but as can be seen in the table below, someone's tax may actually increase.
Even if Rakes fails to invest Rs 5,200 per month in the tax-saving fund as suggested above, he will still incur losses under the new tax system. He will have to pay an additional Rs 20,900 in taxes. So, Rakes should continue with the old tax system.
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He should also have a fund equivalent to spending at least six months. It may be maintained in a collaboration of sweep-in fixed deposits and liquid funds. If he is financially dependent, he should buy an authentic term plan. Its premium is also exempt under Section 80C finally; a medical emergency can be financially tedious. Thus, adequate health insurance cover is essential.
How to choose between old and new tax structures
See the table 'More useful structures'. It shows that if you have a discount of Rs 2,755,000 (Standard discount, 1.5 lakh 80C limit, 50,000 additional NPS contribution under Section80CCD (1B), and medical insurance premium of Rs 25,000 under Section 80D) and Go for a discount, however, if your income is up to Rs 15 lakh, you can pay much less tax on the existing system.
The difference beyond this amount is nominal and one can choose it for the convenience of new tax slabs. Of course, if you are able to claim more discounts and rebates, your tax liability may be lower.
