Companies have started working on the compensation plans for the new financial year. Many have already asked their employees to submit their tax declaration for FY 2020-21. Among other things, employees are also being asked whether they want to be taxed as per the old or new tax regime.
The Finance Bill 2020 proposed a new tax regime with lower tax rates. The intent was to give individuals, especially salaried taxpayers with annual income of less than Rs 15 lakh, the benefit of a short term cash flow. However, the new tax regime with lower rates does not allow most of the tax exemptions and deductions that taxpayers usually claim to meet the family’s financial needs.
We are not in favour of paying taxes without ensuring your family’s financial well being. Therefore, we recommend that taxpayers stick with the old tax regime that existed in FY 2019–20.
Our experience tells us that the old tax regime is better because the various tax deductions and exemptions can effectively reduce the tax on a CTC of Rs 15 lakh to nearly zero. Moreover, the deductions help in utilizing the money to ensure your family’s financial well being.
On the other hand, when you pay tax, there is no direct benefit to your family in the form of free medical treatment in private hospitals, free education in the best schools, lower interest rate on home loans, higher interest on your deposits and assured pension after retirement. Therefore, we strongly recommend that you channelize your hard-earned money into tax-saving options that fulfil your family’s financial needs.
What’s the primary objective of working hard for almost 30 years of your life? For most people, it is providing necessary funds for family members’ financial needs. This would include retirement income, children education and marriage, house for family, travelling with family or paying for a medical emergency. All these are part of a family’s financial well being and the deductions and exemptions in the old tax regime ensured that individuals focused attention on them.
In fact, if you opt for the new tax regime, you could fall short of cash and jeopardise your financial protection. To understand this better, let us look at the tax saving options available in the old tax regime and the role they played in providing financial well being to the individual.
Medical insurance premium: A medical emergency can come to anyone, any day – even when you are jobless. We are not even talking of serious illnesses such as Covid-19, cancer, brain haemorrhage or a road accident, but even less dangerous ailments like malaria, jaundice and food poisoning can leave you with a fat hospitalization bill. The medical cover provided by companies is inadequate – get a reality check by asking the maximum bill in any hospital. In such emergencies, a cashless medical cover helps in avoiding sale of assets or borrowing from relatives. In some situations it can also mean not being able to afford the best treatment available. Would you like to pay tax or medical insurance premium?
Life insurance: People do dream to live up to 100 years but in reality life has no expiry date. How do you ensure that your family’s financial expenses and status are maintained even when you are not there? Simply by getting the adequate term cover and paying regular premium for the same. Do you want to pay tax and leave your family to fate or pay the premium and claim tax deduction for the same?
House rent allowance: A house is a primary need and most people in the lower income bracket either live in their parents’ house or a rented one. It takes time to build your own house. In a situation where a taxpayer is sharing the household expenses with parents, he can save tax by paying them rent if parents are not having income. Similarly, the rent paid to landlords helps save up to 30% in tax under the old tax regime. Do you want to pay tax but not help parents’ household expenses or your cash flow?
Saving for retirement: The Provident Fund and LIC are the most preferred investments for retirement, but these are not eligible for deduction under the new tax regime. This is because 80C deductions are not available if you choose new tax regime. Do you want to pay tax and not to save for your retirement?
Buying or building your own house: Owning a house is another way to ensure a comfortable retirement especially where there is no pension. But the interest paid on a loan for a self-occupied house 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. If you take a home loan, the tax saved can pay almost 50% of the EMI. Do you want to pay tax and not to build house for your family and for your retirement?
Children 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, including child Ulips, Sukanya Samriddhi Yojana, Public Provident Fund and 5-year fixed deposits. Even the interest paid on an education loan can be claimed as a deduction. But there is no such deduction available under the new tax regime.
Travelling with family: We all feel happy when travelling with our family. Why not add a cherry on this cake by claiming 30% off on the ticket price? That is what you get in tax savings on LTA. Do you want to pay tax and not travel with your family?
Lose standard deduction too: There is also a standard deduction of Rs 50000 for salaried individuals and those drawing a pension from employers. There is no need for any bill to be submitted for this deduction. Do you want to pay tax in new tax regime or avail this auto deduction by continuing in the old tax regime?
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Tax Planning & Optimization, Tax Refunds 80C investments for next 5 years, fund debt during retirement, retirement cash flow, structure the CTC. permalink. Edit
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