When this year’s Budget proposed a new tax regime with lower tax rates, the intent was to give individuals the benefit of a short term cash flow. However, the new tax regime does not allow most of the tax exemptions and deductions that taxpayers usually claim to meet the family’s financial needs.
We recommend that taxpayers stick with the old tax regime that existed in FY 2019–20. The old regime is better because the various tax deductions and exemptions can effectively reduce the tax on a CTC of Rs 10 lakh to nearly zero. Moreover, the deductions help in utilising the money to ensure your family’s financial well being. There is also a standard deduction of Rs 50,000 for salaried individuals and those drawing a pension from employers. There is no need to submit any bill for this deduction.
We believe it is better to channelise your hard-earned money into tax-saving options that fulfil your family’s financial needs. To understand this better, let us look at the tax saving options available in the old tax regime and the role they play in the financial plan of the individual.
Common deductions and exemptions that taxpayers forego under the new tax system
House rent allowance
Many taxpayers, especially young people, live in rented accommodation. A taxpayer can claim exemption for the rent paid, thus reducing the full impact of the expense.
Saving for financial goals
Investments under Sec 80C are not eligible for deduction under the new tax regime. It is universally accepted that these tax breaks push people to save more.
Buying or building your own house
Owning a house is everyone’s dream. But the interest paid on a home loan is not eligible for tax deduction like in the old tax regime. Similarly, the principal repayment amount is also not eligible for deduction in the new tax regime.
Medical insurance premium
In a medical emergency, a health plan helps avoid sale of assets or borrowing from relatives. Without medical cover, one may not be able to afford the best treatment available.
People do dream to live up to 100 years but in reality life has no expiry date. Under the old system, you can buy life insurance and claim deduction for the premium paid.
Children’s education & marriage
All parents aim to give the best education to their children. The old tax regime offers deduction for children’s tuition fee as also for various investments done for that purpose. Even the interest on education loans is deductible.
Travelling with family
After the lockdown is over and the Covid scare subsides, won’t you want to take your family for a holiday? You can get up to 30% off on the air and railway ticket if you get LTA. But LTA is not tax free under the new regime.