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New Tax Regime or Old Tax Regime

Time to Choose Your Pick: New Tax Regime or Old Tax Regime?

It is again the time of the year when you have to submit your investment details to your employer. This year, you will have to choose between the old tax regime or the new tax structure. Whatever tax structure you adopt, it will be effective for the entire financial year.

Here’s how the old and new tax regime compare against each other:

Tax Slab(in Rs.) Tax rate under the old regime Tax rate under the new tax regime
0-Rs.2.5 lakhs 0% 0%
Rs.2.5 lakhs to Rs.5 lakhs 5% 5%
Rs.5 lakhs to Rs.7.5 lakhs 20% 10%
Rs.7.5 lakhs to Rs.10 lakhs 20% 15%
Rs.10 lakhs to Rs.12.50 lakhs 30% 20%
Rs.12.50 lakhs to Rs.15 lakhs 30% 25%
Rs.15 lakhs and above 30% 30%

Finance Minister Nirmala Sitharamanin her budget speech of 2020 announced a new tax regime with more tax slabs and lower tax rates on income up to Rs.15 lakhs. However, tax payers can’t avail tax benefits such as the standard deduction of Rs.50,000, deductions under section 80C and 80D, concessions on the interest paid on home loan or rent under the new tax regime. 

Advantages of the new tax regime:

Reduced tax rates and easy tax filing: When compared to the old tax system, the tax rate on the new tax regime is lower. Moreover, as exemptions are not available in this system, tax filing will be easier.

More money in hands:With the reduced tax rate, individuals can have more disposable income in their hands.

Invest in investment options in their choice: Most of the tax saving instruments have lock-in period. Many tax payers may not be comfortable in investing in these investment options due to the lock-in period or other reasons. With the new tax structure, individuals can invest in investment options of their choice.

Drawbacks of the new tax regime:

Under the new tax structure, individuals can’t avail any tax deductions under various sections. Some of the popular tax saving avenues such as investments available under section 80C and 80D, house rent, interest on home loan, leave travel concession etc. can’t be availed. The Ministry of Finance has removed around 70 exemptions out of the 120 exemptions.

Whether to choose the old tax regime or new tax regime

If you are looking for a simple answer to this question, then we hate to share the fact that there is one line answer to that question. You can arrive the right tax structure after calculating how much tax you are able to saving through both the tax structures.

To figure out the best tax structure, calculate the exemptions that you are availing and the deductions that you claim. Rent on house, travel leave allowance, food bills and phone bills might be some of the exemptions that you are currently availing. If you are salaried employee, you automatically get a tax exemption of Rs.50,000 and EPF contribution. Also, calculate the deductions that you claim against your home loan, education loan and other investments.

Now, calculate the taxable income by adding the exemptions and deductions and subtracting it from your salary. This can help you to figure out the favourable tax regime.

Let us understand it with the help of two examples. Let us consider two tax payers with an annual income of Rs.7.5 lakhs and annual income of up to Rs.10 lakhs respectively. For ease, we take that the individuals have invested  the maximum amount under various heads.

Annual income of Rs.7.5 lakhs

Let us first calculate the tax payable without any exemptions and compare the old tax and new structure. 

  Old Tax structure   New Tax structure  
Income tax slab Tax Rate Tax(in Rs.) Tax Rate Tax(in Rs.)
Up to Rs.2.5 lakhs 0 0 0 0
Up to Rs.5 lakhs 5% 12500 5% 12500
Up to Rs.7.5 lakhs 20% 50000 10% 25000
Total   62500   37500
Health and education cess 4% 2500 4% 1500
Tax payable   65000   39000

We see that new tax structure is favourable without any tax exemptions.

Now, let us assume that the tax payer uses different benefits.

Annual Income with Tax Exemptions
Annual Income 7,50,000
Exemptions under 80C 1,50,000
80CCD(1B) 50000
80D 50000
HRA 10000
Taxable income  490000

In this case, as the taxable income is below Rs.5 lakhs, the person does not have to pay any tax. So, we see that when the individual uses the different tax saving options, the tax payer does not have to pay any tax.

Annual income of Rs.10 lakhs

  Old Tax structure   New Tax structure  
Income tax slab Tax Rate Tax(in Rs.) Tax Rate Tax(in Rs.)
Up to Rs.2.5 lakhs 0 0 0 0
Up to Rs.5 lakhs 5% 12500 5% 12500
Up to Rs.7.5 lakhs 20% 50000 10% 25000
Up to Rs.10 lakhs 20% 50000 15% 37500
Total   112500   75000
Health and education cess 4% 4500 4% 3000
Tax payable   117000   78000

Here we see that new tax regime results in lesser taxes.

Let us see the impact on taxable income if we consider deductions.

Taxable Income  with Tax Exemptions
Annual Income 10,00,000
Exemptions under 80C 1,50,000
80CCD(1B) 50000
80D 50000
HRA 10000
Taxable income  740000

In this case, the taxable income falls below Rs.7.5 lakhs.

Now, let us compare the old tax structure with exemptions and the new tax structure.

  Old Tax structure New Tax structure
Income tax slab Tax Rate Tax(in Rs.) Tax Rate Tax(in Rs.)
Up to Rs.2.5 lakhs 0 0 0 0
Up to Rs.5 lakhs 5% 12500 5% 12500
Up to Rs.7.5 lakhs 20% 50000 10% 25000
Up to Rs.10 lakhs   0 15% 37500
Total   62500   75000
Health and education cess 4% 2500 4% 3000
Tax payable   65000   78000

We see that the tax payer has to pay less tax if the old tax structure with exemptions is opted.

Conclusion:While many investment options offer tax benefits, tax planning should be the main focus while taking any investment decisions. Finding out the best tax regime will depend on various factors such as tax slab, deductions and exemptions availed and investment options. So, talk to your CA or financial advisor to figure out the best tax regime. 

 

 

Use of Emergency Fund

Build Your Emergency Fund? Know When to Use Your Emergency Fund

In the current state of affairs, it has become important to build a sizeable emergency fund corpus to take care of any emergency requirements.

It is important to build an emergency fund. Similarly, it is important to know when to use your emergency fund.

Typically, you can accumulate your emergency fund in a savings account and liquid fund. We suggest that you park one-third of your emergency corpus in a savings account to meet your short-term emergency expenses and two-thirds in a liquid fund to take care of your long-term expenses.

In this article, we will find out when you should use your emergency fund.

Questions to ask yourself before using your emergency fund?

Before you dip into your emergency fund, you can ask yourself these three questions.

  1. Is it unexpected?

Unexpected events such as job loss or house repair call for an emergency fund. Diwali shopping or yearly car maintenance or health check-up are expected events and take place every year.

  1. Is it necessary?

This question will help you figure out between a need and a want. It is because at the moment, it may be hard for you to figure whether it is an emergency.

  1. Is it urgent?

Ask yourself if the situation is urgent or whether you can postpone it to a later date. If you can postpone it with no negative implications, there is a higher probability that it is not urgent.

When you should use your Emergency Fund?

The three questions mentioned in the previous section will help you understand whether you need to use your emergency fund. However, there are certain situations where it is essential to use your emergency fund. Here are six such circumstances:

  1. Job Loss

Many people have lost their jobs in the current scenario. Jobs of many people are at risk. Emergency fund can help in such circumstances. The emergency fund can take care of the expenses till you find a new job. Other than taking take care of expenses, you will also be able to pay your outstanding EMIs and insurance policy premiums on time.It will keep your family protected, protect your credit score from slipping, and avoid piling up credit card debt. As in worst circumstances, you may be without a job for a few months; emergency fund accumulated in a liquid fund can support you and your family.  

  1. Medical Emergency

Medical emergencies are unexpected events. When youface any other medical emergency, an emergency fund can come to aid in these situations.

If you don’t have a health insurance, you may have to shell out thousands on a medical treatment. Even if you have a health insurance, depending on your health insurance plan, you may need to take care of pre-hospitalisation and post hospitalisation costs from your pocket. 

  1. Car Repairs

Your car just like any other form of machinery requires proper maintenance. Even if you take your car for annual maintenance, there can be an unexpected need to get your car repaired by a mechanic. The amount required to repair your car will depend on the damage. As it is an urgent situation, there is no harm in dipping into your savings account emergency fund to repair your car.

  1. Home Repairs

Home repair is another unexpected urgent expense. Your roof falling down with no warning, water pipes bursting and your AC failure in the blasting summer are a few of the examples that will require your immediate attention.  You can use your short-term emergency corpus to take care of these requirements.  

  1. Family Emergency

Families form an integral part of our lives. Our family members may face emergencies and may not be financially well equipped to handle the situations. In these situations, it becomes our responsibility to take care of our family members. Whether they are facing a medical emergency or any other emergencies, it is important to help them navigate difficult times with your emergency fund. 

  1. Urgent travel requirements

In this era of globalisation, many people are living in metro cities that are hundreds of kilometres away from their home town. Hence, people may want to visit their hometown for any family emergency. As booking flight tickets in the last moment is expensive, one can use their emergency savings account to book flight tickets.

Also, urgent relocation to another town may also requiredipping into your emergency fund.

Conclusion:

Emergency fund is a must have for everyone. There can be scenarios where you may be tempted to use your emergency fund for non-emergency purposes. In that case, it is important to ask yourself the three questions and figure out if your emergency is any of the six emergencies listed above. This will help you access your emergency fund for the right reasons.

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