Tax planning for salaried individuals can be a puzzle, especially with India’s old vs. new tax regimes. A recent analysis by Chartered Accountant Nitin Kaushik provides a clear rule of thumb for a family earning ₹12 lakh annually.
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The core of the matter boils down to your total deductions.
- New Tax Regime is better if your deductions are ≤ ₹2 lakh. This regime is ideal for those with minimal investments or loans. It’s simpler, with less paperwork, offering a clean, stress-free process.
- Old Tax Regime provides greater savings if your deductions are ≥ ₹2.5 lakh. While it requires more paperwork, it can save you thousands. This is particularly true for families with significant outlays on home loans, insurance, and long-term investments.
Case Study: ₹12 Lakh Annual Income
Let’s break down the numbers for a family earning ₹12 lakh per year.
New Regime:
- Taxable Income: ₹11.5 lakh (after ₹50,000 standard deduction)
- Approx. Tax Payable: ₹1.02 lakh
Old Regime (with typical deductions):
- Typical Deductions: ₹3.25 lakh (e.g., home loan interest, PF, health insurance)
- Taxable Income: ₹8.75 lakh
- Approx. Tax Payable: ₹72,000
- Savings: ~₹30,000 compared to the new regime
As you can see, a family with typical deductions can save a substantial amount by opting for the old regime.
Don’t Forget the Hidden Factors
Kaushik highlights that certain overlooked factors can make a big difference:
- House Rent Allowance (HRA): Renters in metro cities can claim significant exemptions, making the old regime far more attractive.
- Health Insurance: Deductions for parents’ health insurance can add another ₹50,000 to your savings.
- NPS Contributions: Both personal and employer contributions to the National Pension Scheme (NPS) can further increase your deductions.
Your choice of tax regime should align with your life stage. Young professionals with few liabilities may benefit from the simplicity of the new regime. In contrast, mid-career professionals with a home loan, children’s tuition fees, and insurance will likely save more under the old regime.
The key takeaway is to run your own numbers. You can switch between regimes every year, so calculate your potential tax liability annually to ensure you’re making the smartest choice for your financial situation.
