Practical Case Studies on Old vs. New Income Tax Regime.
Introduction:
In the bustling city of Mumbai, India, resides Priya, a middle-class working professional. She finds herself grappling with a challenging decision: whether to opt for the New Tax Regime introduced by the Government or stick with the familiar Old Regime. This decision holds immense significance for Priya and millions of other Indian taxpayers, impacting their financial stability and tax obligations.
Challenging Case Scenario:
Priya, a dedicated employee in the IT sector, is facing a dilemma regarding which tax regime to choose. As the sole breadwinner in her family, Priya must carefully weigh her options. On one hand, the New Regime offers reduced tax slab rates, promising to lower her tax burden. On the other hand, the Old Regime provides various deductions and exemptions that have been beneficial to her in the past. Priya is uncertain about the implications of each regime on her overall financial situation and future planning.
Tax Parity Analysis: Assessing the Equivalence Between Old and New Regimes:
(A): Step-by-Step Guideline to Choose Between Two Regimes:
- Evaluate Personal Financial Situation: Assess your income level, sources of income, and potential changes in income in the foreseeable future. Source of income is prima facie is very important factor to decide the future impact of tax regime. For a salaried class it is very easy to move in or move out from the new regime but at the same level of income it is difficult for a business man or professional to move as such more freely.
- Understand Tax Regime Differences: Familiarize yourself with the key features and implications of both the Old and New Tax Regimes, including tax slab rates, deductions, and exemptions. As you are already committed to long term commitments of investments and Home Loan EMIs and with increase in income level you might me end up paying higher taxes with high cash outgo in your already commitments.
- Conduct Tax Parity Analysis: Calculate the exact amount of specified deductions required to offset the reduced tax liability in the New Regime compared to the Old Regime. (See part B for more specific analysis)
- Consider Future Financial Goals: Take into account long-term financial objectives, such as retirement planning, savings, and investment goals.
- Seek Professional Advice: Consult with a tax advisor or financial expert to gain personalized insights and recommendations based on your individual circumstances.
(B): Break-Even Point Analysis at different income levels:
The table below presents the break-even points at different income levels, indicating the amount of specified deductions needed to offset the reduced tax liability under the new regime:
B-1 – Professionals and Proprietor Businessman
| Income Levels | Deductions Required in Old Regime to Break Even with Reduced Tax Liability |
Tax Liability in Both |
| (1) | (2) | (3) |
| Upto 5,00,000 | Nil | Nil |
| 6,00,000 | 100,000 | Nil |
| 7,00,000 | 200,000 (Additional Deduction 100,00) |
Nil |
| 8,00,000 | 1,87,500 (Additional Deduction less 12,500) |
36,400 |
| 9,00,000 | 2,37,500 (Additional Deduction 50,000) |
46,800 |
| 10,00,000 | 2,62,500
(Additional Deduction 25,000) |
62,400 |
| 11,00,000 | 2,87,500
(Additional Deduction 25,000) |
78,000 |
| 12,00,000 | 3,12,500
(Additional Deduction 25,000) |
93,600 |
| 13,00,000 | 3,12,500
(Additional Deduction NIL) |
1,14,400 |
| 14,00,000 | 3,41,668
(Additional Deduction 29,168) |
1,35,199 ≈
1,35,200 |
| 15,00,000 | 3,75,000 (Additional Deduction 33,332) |
1,56,000 |
| Above 15,00,000 upto 5,00,00,000 | 3,75,000 | As per respective calculations |
B-1 – Salaries employment
| Income Levels | Deductions (Including Standard Deduction) Required for equate tax liability in old and new tax regime | Tax Liability in Both |
| (1) | (2) | (3) |
| Upto 5,00,000 | NIL | Nil |
| 6,00,000 | 1,00,000 | Nil |
| 7,00,000 | 2,00,000
(Additional Deduction 100,00) |
Nil |
| 8,00,000 | 2,12,500
(Additional Deduction 12,500) |
31200 |
| 9,00,000 | 2,62,500
(Additional Deduction 50,000) |
41600 |
| 10,00,000 | 3,00,000
(Additional Deduction 37,500) |
54600 |
| 11,00,000 | 3,25,000
(Additional Deduction 25,000) |
70200 |
| 12,00,000 | 3,50,000
(Additional Deduction 25,000) |
85800 |
| 13,00,000 | 3,62,500
(Additional Deduction 12,500) |
104000 |
| 14,00,000 | 3,75,000
(Additional Deduction 12,500) |
124800 |
| 15,00,000 | 4,08,333
(Additional Deduction 33,333) |
145600 |
| Above 15,00,000 upto 5,00,00,000 | 4,25,000
(Additional Deduction 16,667) |
As per respective calculations |
Observation and learning from above study:
Based on the comprehensive break-even point analysis presented in Tables 1 and 2, it is evident that the tax liability remains the same in both the old and new tax regimes at the break-even point of deductions calculated in column 2 of the tables.
| Scenario | Old Tax Regime | New Tax Regime |
| Available deductions exceed (>) break-even point of deductions | Old regime is more beneficial | N/A |
| Available deductions equal to or less (=<) than break-even point of deductions | N/A | New regime is more beneficial |
| Individuals prefer not to invest in deductible investments | N/A | New regime is more beneficial |
Conclusion:
If available deductions exceed the break-even point of deductions, opting for the old tax regime results in reduced tax liability.
If available deductions are equal to or less than the break-even point, or if individuals prefer not to invest in deductible investments, switching to the new tax regime is advisable to optimize tax outflows.
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