Old Vs New Tax slabs: A Quiz and a Calculator to help you decide

Finance For Beginners

Skinny: Old Vs New tax slabs — it’s probably time for you to declare whether you plan to switch income tax regimes. Should you switch? This post lists four ways which will help you decide — including a quiz and an income tax calculator.

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 SLABS: THE BASICS

Why the fuss?

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

What’s the major difference — old vs new tax slabs?

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 it eliminates most tax-saving related paperwork. 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 DO YOU DECIDE – OLD VS NEW TAX SLABS?

I’ve listed four ways which will help you decide which regime you should pick this year. And they’re listed below in the order of their complexity.

1: Based on life’s immediate, but major commitments

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 you’re 60.
  • 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 have major financial milestones just around the corner, or do not like the idea of having your money locked up for such long periods, pick the new tax regime.


2: Using a simple estimate

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 income level

This combined sum of 2,50,000/- could be made up any types of deductions and exemptions available.

If you’re sure you’ll be claiming more than 2,50,000/- in tax-saving instruments this year as well, you’re sorted. Sticking to the old regime will save more taxes for you.


3: This quiz

This simple quiz provides a reasonably good estimate based on a weighted score of commonly availed tax incentives. We’ve tested it on about 10 sample Form16s and so far, it has been accurate.

But since it expects no math to be input, there could be cases where it’s off. In case it is, write to us at frontdesk@desaivinod.com. It’ll help us adjust the weights.

Do you have an ongoing home loan?

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

Do you plan to buy a term life insurance policy?

Do you have an ongoing education loan?

This year, how much do you plan to invest per month towards your long term future?
[Long term investments like Equity mutual funds, NSCs, PPF, VPF]
Do you plan to invest in NPS this year?
If you live in a rental property, will you be able to provide rental proofs?
Do you plan to travel to a faraway destination this year? This could be a trip home or a vacation.
Do you foresee a major expense coming up within the next three years?
[Expenses like an expensive post-graduation course, wedding, down payment for a house]

4: Using Form16 and this income simple tax calculator

This income tax calculator below provides a quick way to help you compare your tax liability in the the two tax regimes. It tells you exactly the tax you’ll be paying in each, and will recommend the one that saves you more.

You’ll need your latest Form-16 handy. Look for it in your work mail and you should see a mail from your HR or payroll team.

The calculator has only two fields to input.

  1. Your Gross salary &
  2. The Total value of deductions and exemptions you availed/plan-to-avail .

How to calculate the total value of deductions and exemptions you claimed last year?

Dig up your latest Form 16-PartB, and look for the following four entries:

  • (2h) Total amount of exemption claimed under section 10
  • (5) Total amount of deductions under section 16
  • (11) Aggregate of deductible amount under Chapter VI-A
  • (7a) Income (or admissible loss) from house property reported by employee offered for TDS

Adding all these together will give you the total value of deductions and exemptions you had claimed last year.

This last year’s value will give you a reasonably good estimate to what you’ll be able to claim this year.

Now, if the difference in the two regimes as seen in the calculator is marginal, and there’s less likelihood of the difference increasing this year, pick the new regime. Why? Since the difference is quite low anyway, you might as well reduce your tax paperwork.


That’s it. These four tools should provide you plenty of info to decide on your tax regime change decision.

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Good luck.