Budget 2020 India: The good news first. Union Finance Minister Nirmala Sitharaman’s proposed new income tax regime does a great job of putting more cash in your hand through lower taxation of your income at various slabs.
Mrs Sitharaman, in her second Budget speech, proposed a new system of income tax wherein taxpayers can choose whether to remain at the existing tax slabs and avail tax deductions or moving to the new regime where they can enjoy lower tax rates but will have to forgo deductions.
BankBazaar ran some numbers following the budget speech, and it’s clear that the new rules offer lower taxation, whichever level of income you are at—assuming you avail no deductions at all. However, the numbers also reveal that if you avail large deductions such as those available for home loan repayment and insurance purchases, you could enjoy lower taxes by remaining in the old regime.
So, the dilemma is this: come 2020-21, should you plan to avail the benefits of the new regime, or continue with the old one? The new tax regime offers a much-required change of mindset in insuring and investing. Let’s examine some thoughts that may help you decide.
No Pressure To Buy Tax-Savers
Should you choose to move to the new regime, you are no longer under the pressure to avail tax-deductions by buying tax-saving insurance and investment products. This is excellent for taxpayers at lower levels of income (Rs 10 lakh and less), who may feel the stress of increasing costs of living more acutely.
Freedom To Buy Regular Investments
Not all investment is done for tax-saving. There are several forms of investments that don’t save you income tax. For example, most mutual fund investments don’t provide tax deductions. Therefore, under the new regime, you are free to invest and insure without the burden of hitting the exemption limits (such as Rs. 1.5 lakh under Section 80C). You can invest simply to create wealth, and this would help you make better investment choices and avoid tax-saving investments that often provide terrible returns. But…
Take Stock Of Existing Investment & Insurance Commitments
What if you are already committed to insurance plans, or have a home loan to repay? There may be large-sized deductions you’re eligible for. Let’s say you avail deductions of Rs. 1.5 lakh under 80C, Rs. 2 lakh for home loan interest under Section 24B, and Rs. 50,000 for health insurance under Section 80D, thus having a total deduction of Rs. 4 lakh. This can make a sizeable impact on your tax outgo, and it may be wiser for you to remain in the old tax regime and avail all these deductions. The key is to know what works better for you.
Don’t Make The Mistake Of Not Insuring
Under the new regime, you may be tempted to not buy life and health insurance products. You may think you don’t need them if you’re not going to avail deductions. Don’t make this mistake. Tax-saving is a secondary benefit of buying insurance. The primary benefit is the financial safety of your family. Without a term plan, your dependents will be at serious financial risk. Without health insurance, a single hospitalisation may deplete your family’s savings. Therefore, continue to cover yourself appropriately.
Don’t Switch Without Calculations
Mrs Sitharaman said that the new regime will help simplify taxation. I would agree with her but would like to add that you now have the responsibility of choosing between two regimes carefully. Therefore, use a tax calculator, ask an accountant, and do your research before you decide. Because the right decision would help you save more money.