Tax Savings

Benefits Of The New Income Tax Regime


The revised personal taxation regime in Budget 2020 offers lower tax rates. But it also has greater tax brackets for individual filers. Also, it nullifies all exemptions and deductions.

The Finance Minister gave taxpayers a choice between the old and new tax regimes. This added complexity to the situation. Taxpayers struggle to make sense of their income tax returns. That’s due to the complexity of the subject and the sheer number of variables at play.

Also, several people calculate deductions by deducting them from their tax liabilities. Instead, they should deduct it from their gross income. This article provides a layman’s explanation of the new income tax regime.

Benefits of the New Income Tax Regime

  • The tax rate changes under the new system are beneficial. Despite the new regime’s lower taxes, many accessible exemptions and deductions have gone. The new tax law requires less paperwork to be filed by individuals, and it’s also easier to file taxes.
  • We now have more options for tailoring their investments thanks to the new tax structure. A taxpayer can only claim a deduction if they invest in one of the specified instruments. This characteristic will limit taxpayers’ ability to invest as they see fit. But it will give such people vast leeway to tailor their portfolios to their specific needs.
  • Liquidity will improve due to the new tax system. Plus, lower rates will result in higher individual take-home pay. People, in this case, who couldn’t invest in particular things for some reason, will love this.
  • With the new tax framework, investors can lock in their funds for a set time. We can no longer take advantage of deductions and allowances. The taxpayers who don’t have to invest in any way will gain from this. That’s because many investment contracts prohibit withdrawals during a certain time frame. They now have access to many investment vehicles. These are open-ended mutual funds that offer good returns.

What’s good about the New Income Tax Regime?

Those with minimal sway over policy programmes will enjoy the new income tax rate. There are seven progressive tax brackets under this plan. Paying a reduced upfront tax rate is an option for all taxpayers. It is a great addition to the current system for those who do not qualify for exemptions. 

Take the example of an individual with a total gross income of up to Rs 12 lakh. He also has investments worth less than Rs. 1.91 lakh. He was subject to a higher tax rate under the previous regime. That’s why the new system is better if you plan to save less money through loopholes.

The new system is less complicated. Hence, fewer filing mistakes will occur if companies switch. Nirmala Sitharaman said the new income tax system would simplify filing. Thus, the new approach makes it easier to file taxes if you have no or few investments to report.

Participation in the plan is voluntary. Hence, individuals can adopt a different system once the annual reviews finish. Yet, a taxpayer must have no business income to transition from the old to the new system. As a result, taxpayers will have more leeway to select the most helpful tax plan.

To help prevent income tax fraud, the government has disallowed 70 exemptions. That’s because many people have exaggerated their tax returns to receive larger refunds. Yet, consider the elimination of so many exclusions under the current system. Due to this, the opportunity for abuse of the exemption regulations has lessened.

What’s Bad About the New Income Tax Regime?

In place of deductions, the new tax system offers lower tax rates. It helps those who don’t have much to invest. Still, it’s bad news for those who put away significant money in tax-free savings products. Products like the PPF or NPS.

They will still owe more money to the government even if they switch to the new regime with a reduced tax rate. That’s because they won’t be able to take advantage of any exemptions. Under the current system, you can get a big tax break by deducting up to Rs 2 lakh in expenses.

Seventy-used exclusions will no longer exist under the new income tax system. Hence, people may be less inclined to engage in tax-free programs. Thus, reducing household savings. The person’s future savings will be affected, despite the reduction in the tax rate. 

Here’s a line from Abhishek Soni, CEO of Tax2win, a tax advisory service. “Consider a taxpayer who contributes Rs 2,00,000 per year toward a tax-saving plan. At the age of 35, that person can expect to have more than Rs 50,00,000 in their possession by the time they reach the age of 60. 

The taxpayer benefits in two ways. First, they pay no taxes on the money they put into these assets. Second, they have a sizable nest egg when they retire.

According to analysts, the new income tax system can deter real estate investments. Yet, it’s worth noting that buying and renting a home is a fantastic way to reduce your taxable income in India. 

Yet, the current tax plan does not provide such breaks. Hence, demand in the real estate market may decline. Suppose the insurance industry has to spend more money and time attracting investors. In that case, it will also suffer. As a result, insurers may see less business due to the new income tax structure.

Which tax slab should you choose?

There is no universal solution to this topic. That’s because it depends on individual circumstances and yearly income. The new income tax bracket and the previous bracket both have benefits and drawbacks. The new tax slab provides a range of income brackets with matching tax rates. Thus, whether you want to take advantage of these deductions and exemptions is up to you. In the previous tax bracket, there were allowances and reductions. So, before you file your taxes, reviewing and comparing both tax systems is wise.


There can be a miscommunication with the implementation of the new tax regime. Still, you can address these with proper preparation.

Before making an informed decision about which tax system to adopt, you must be careful. That’s because comparing the systems and highlighting their advantages is important. Thus, we recommend you continue with the old tax regime if you see no benefit in the new system.

Individual taxpayers can use the benefits above and the cons to decide which tax regime is best for them. Individual taxpayers can make the best choice possible. They can do so if they take the time to read through all the details and compare the two taxes. Use the two different tax structures to your advantage.

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