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How to use IT department’s official tax calculator to choose between old and new tax regimes

You can compare your tax outgo under both and opt for the one where tax liability is lower.

February 23, 2023 / 07:52 AM IST

Are you finding it difficult to compare and decide which tax regime—the old or the new—is better suited for you?

You may have heard and read enough about the aspects you need to take into account, but now the income tax department itself has released an official functionality to help you make the decision.

The new calculator has been made available on the income tax department’s website— It simplifies the process of tax calculation and helps taxpayers understand the difference between the taxable income and tax liability under the two tax systems.

The old tax regime allows taxpayers to claim several deductions and exemptions while calculating income tax. On the other hand, the new tax regime introduced in Budget 2020-21 offers lower tax rates but eliminates many exemptions and deductions available under the old regime.

Also read: New income-tax regime: Should you switch, when to switch, exemptions and benefits decoded

How the new calculator helps

The new income tax calculator shows the difference between the tax liability under both systems side by side, making it easier for taxpayers to understand the impact of their choice. It takes into account the taxpayer's income, deductions, exemptions and other relevant factors to determine the tax liability.

The new tool allows taxpayers to quickly and easily calculate their liability under both regimes and make an informed decision as they no longer need to calculate their tax liability separately and then compare.

In the recent budget, the government introduced a few additional benefits for those who choose to go with the new regime. The budget proposes to allow standard deduction of up to Rs 50,000 for salaried taxpayers even under the new tax regime, which will provide some relief to those who opt for the new system.

Additionally, the budget also proposes to reduce the surcharge from the prevailing 37 percent to 25 percent from the next fiscal for those with an income above Rs 5 crore.

These benefits are expected to encourage more taxpayers to choose the new tax regime. However, it is important to note that the old tax regime is not being phased out immediately. Taxpayers can still choose to use the old tax regime if they prefer, although the government has indicated that it intends to make the old regime redundant eventually.

Also read: Earning Rs 10 lakh per annum? Higher deductions will mean more savings under the old tax regime

Who should switch to the new tax regime and who should not?

The decision depends on the income level and deductions and exemptions one can claim.

Income up to Rs 7 lakh

Thanks to enhanced tax rebate under Section 87A, those who are expected to have an income below Rs 7 lakh in the next fiscal can without doubt switch to the new tax regime. Under Section 87A, a rebate is allowed to taxpayers with an income below Rs 5 lakh.

Budget 2023 proposed to increase the threshold limit under this section to income of up to Rs 7 lakh under the new regime (applicable for FY24), while the limit remains the same, i.e., Rs 5 lakh, under the old tax regime. As a result, the new tax regime becomes favourable for taxpayers expected to have incomes up to Rs 7 lakh in the next fiscal.

Income above Rs 7 lakh

In case your income for FY24 is expected to be above Rs 7 lakh, then deductions and exemptions you can avail come into play. If you are not looking forward to making investments or have expenses that can be claimed as deductions under various sections like 80C, 80D and so on, you may find it beneficial to go with the new regime as the tax rate is lower.

However, if you intend to make a full claim of deductions under sections 80C and 80D, i.e., Rs 1.5 lakh and Rs 25,000 for individuals below the age of 60 years, you may go ahead with the old tax regime, if your income is up to Rs 8.25 lakh.

You can continue with the old tax regime if you have other deductions to claim for like deductions against interest payment on home loan under Section 24b and so on. In this case, if you claim a deduction of up to Rs 3.75 lakh (80C, 80D and 24b put together), it is beneficial to go with the old tax regime for incomes up to Rs 15.5 lakh.

It does not make any difference for those having income above Rs 15.5 lakh to income and up to Rs 5 crore, if they also have the option to claim deductions of Rs 3.75 lakh (apart from standard deduction of Rs 50,000, which is now also available under the new regime). In this case, the liability remains the same under both regimes.

Income above Rs 5 crore

You should definitely opt for the new tax regime if your income is above Rs 5 crore. The proposal to bring down the surcharge from 37 percent to 25 percent for those earning more than Rs 5 crore brings down the overall tax liability by approximately 4 percent.

So even if a person claims most of the popular deductions and exemptions available under the old tax regime, he or she will still be able to save more because of the proposed reduction in surcharge rate under the new tax regime.

In conclusion, the new income tax calculator launched by the I-T department is a welcome development. It simplifies the tax calculation process, offers greater transparency and clarity, and allows taxpayers to make an informed decision on which regime to choose.

The additional benefits introduced in the recent budget for the new tax regime are expected to further incentivise taxpayers to choose this regime. However, taxpayers should carefully evaluate their options and choose the regime that best suits their individual circumstances.

Ashwini Kumar Sharma
first published: Feb 23, 2023 07:52 am