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Should you switch to the New Income Tax Slabs

After the announcement of the Union Budget 2020, the question that most people have is whether they should switch to the New Income Tax Slab or not? Is it beneficial to the taxpayers across the board? However, all this seems unlikely.

According to calculations, high-income employees would benefit from the old tax regime compared to the new one. On the other hand, people who fall under the lower tax bracket are said to benefit from the new tax regime.

Hence, at the beginning of the financial year 2020-21, you will have to decide whether you want to follow the old tax regime or switch to the new tax slabs.

Under the new Income Tax slabs, many tax deductions such as exemptions under Section 80C investments of up to INR 1.5 lakh, Section 80CCD (1B) offering additional exemptions of up to INR 50,000 on NPS contributions, house rent allowances, housing loan interest, and others will be redundant.

However, the income tax deductions under Section 80CCD(2) for the National Pension System (NPS) are bound to continue under the new regime. Switching to the new tax slab is however still beneficial if your employer offers the option.

In fact, an employer’s contribution of up to 10% of your salary is eligible for tax exemption under Section 80CCD(2). For government workers, this limit is up to 14%.

For people who have just started earning and want to follow a simple tax process should consider switching to the new regime. This is because these individuals are less likely to have made any deductions under Section 80C investments or have taken a home loan.

However, high salaried employees who have dedicatedly been following the old tax regime can find it challenging to save money on tax under the new income tax slabs. For instance, people earning INR 15 lakh or more will have to pay INR 14,820 as tax under the new regime, considering standard deductions, professional tax, and 80C investments.

Most individuals usually claim for the House Rent Allowance exemption or deductions under the housing loan interest. This is apart from the tax benefits earned on health insurance premiums. Thus, if your exemptions total for up to INR 3 lakh, then you will have to shell out additional INR 15,600 under the new regime.

So, for those who have been seeking exemptions under Section 80C investments should highly consider sticking to the old regime. Having said this, for even those who are starting our anew can follow the old regime and redeem tax benefits under the same.

One such investment that allows Section 80C tax deductions is ULIPs. Unit Linked Insurance plans is primarily an insurance product that offers dual benefits of life insurance coverage as well as investments. It is one of the most popular investment instruments available in the market.

The ULIP tax benefits include deduction under Section 80C for up to INR 1.5 lakh paid as premiums. Also, the maturity amount is tax-free under Section 10(10D) of the Income Tax Act, 1961. ULIP is quite a beneficial financial vehicle for young as well as senior investors. It is, however, recommended to invest in long-term ULIPs to reap its benefits.

 

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