Which Tax Regime is Better for Income Above 15 Lakhs?
Updated: Jun 4
For those earning above 15 lakhs annually, efficient tax planning is an important component of maximizing take-home pay and minimizing tax liabilities. In this article, we will be sharing some practical and strategic ways of saving taxes for those with salaries above 15 lakhs. From understanding the specifics of available deductions and exemptions to smart investment strategies that not only help save tax but also grow wealth, we have it all covered. Let's explore how to save taxes and make the most of your hard-earned money.
Table of Contents:
Which Tax Regime is Better for Income Above 15 Lakhs? Introduction
A taxpayer in India has the option of selecting between two tax regimes: the old tax regime and the new tax regime. Each tax regime has its tax slabs, rates, and rules for deductions and exemptions. The choice of regime significantly impacts the financial planning of taxpayers, especially those who earn salaries above 15 lakhs.
Old Tax Regime
The old tax regime has a more complex structure with a series of tax slabs and rates, though it allows flexibility with respect to a large number of tax deductions and exemptions on items like Section 80C for investments, Section 80D for medical insurance, HRA, LTA, and many more. For a person with a high income, this regime provides a lot of benefit, provided he is able to take full advantage of all the available tax deductions and exemptions in order to bring his taxable income down to a reasonable level.
New Tax Regime
The new tax regime was rolled out in 2020. It has simplified tax slabs with generally lower tax rates but at the cost of giving up most tax deductions and exemptions. This regime aims to reduce the administrative hassle of tax compliance and shall benefit those who have no significant investments or expenses that can be claimed as deductions under the old regime.
Importance of Choosing the Right Regime
Choosing the right tax regime is very important, considering the fact that income above 15 lakh has to go through a lot of taxes. The choice should be based on one's sources of income, the permissible deductions, and long-term financial goals. Those who claim a substantial deduction under the old regime will find a big benefit, while others with minimal deductible expenses could go for the new regime that provides them with tax rates that are lower.
Overview of the New and Old Tax Regimes
Taxpayers in India have the option to select between two different tax regimes while filing their income tax returns: the Old Tax Regime and the New Tax Regime. These regimes carry with them variations in rules, tax slabs, deductions, and exemptions. Thereby making the choice amongst them very important according to individual financial conditions and goals.
Description of the Old Tax Regime
The old tax regime is progressive in nature, with multiple tax slabs and high rates, yet it compensates for this with a wide range of deductions and exemptions. The tax rate in this regime ranges from 5% for incomes between INR 2,50,001 to INR 5,00,000 to 30% for incomes above INR 10,00,000. There is also a surcharge for higher income brackets. Key deductions under the old regime include:
Section 80C: Investments in EPF, PPF, NSC, ELSS, life insurance premiums, tuition fees, etc., up to a limit of INR 1,50,000.
Section 80D: Deductions for medical insurance premiums.
Section 24: Interest on home loan for house property income.
HRA, LTA, and other exemptions based on specific conditions and proofs.
Description of the New Tax Regime
The new regime was introduced in the 2020 budget. It promises more simplified tax slabs with lower rates, but it requires taxpayers to let go of almost all the deductions and exemptions available under the old regime. The idea was to make the process of tax filing easier and reduce dependence on tax-saving financial products.
The tax slabs under the new regime are:
Income Range | Tax Rates under New Tax Regime |
Up to INR 3,00,000 | Nil |
INR 3,00,001 to INR 6,00,000 | 5% |
INR 6,00,001 to INR 9,00,000 | 10% |
INR 9,00,001 to INR 12,00,000 | 15% |
INR 12,00,001 to INR 15,00,000 | 20% |
Above INR 15,00,000 | 30% |
Which Tax Regime is Better for Income Above 15 Lakhs? Key Considerations
While deciding between old and new tax regimes, an individual earning more than 15 lakhs per annum must consider the whole financial picture. The nature of income, the deductions available, and whether flexibility is needed or not in tax planning are pivotal in making this decision.
Nature of Income
The nature and type of income are major deciding factors in choosing the tax regime. For high earners, income could be diversified, including:
Salaries: Income from employment and consulting is periodic and gets deductions available for HRA and standard deduction in the old regime.
Capital Gains: It is income from the sale of assets like stock or property. The old regime has exemptions under sections 54 and 54F which are not available under the new regime.
Rental Income: Income from property rentals can be set off against municipal taxes paid and interest on home loans taken under the old regime.
Business Income: Business owners are allowed many deductions through expenses incurred under the old regime that might make it more attractive.
The choice of regime might vary with the form of income that dominates the finances of an individual. For example, a salaried person with huge rental and capital gains might prefer the old regime for availing particular deductions and exemptions.
Available Deductions and Exemptions
High earners often claim considerable deductions under the old tax regime, which can drastically reduce the amount of income on which income tax is to be paid. Some of the most frequently claimed deductions are:
Section 80C: Deductions of up to INR 1.5 lakh in respect of investments in PPF, ELSS, NSC, life insurance premiums, and so on.
Section 80D: Deductions for medical insurance premiums.
Section 24: Interest on home loans is tax-deductible; a great benefit for people owning housing loans.
HRA Exemption: Exemption based on house rent allowance, which benefits people who are renting houses in metropolitan cities.
Education Loan Interest under Section 80E: Exemption on the interest paid toward education loans.
All these deductions and exemptions are withdrawn under the new regime, which does not provide for the claim of most of these except a few, like deduction for employer's contribution to NPS.
Flexibility and Simplicity
The old regime offers a lot of flexibility, allowing taxpayers to tailor deductions and exemptions based on their expenses and investments. This would be to the advantage of those who have substantially deductible expenses or are smart investors.
On the other side, the new regime offers simplicity with reduced tax rates and fewer deductions. It could be very helpful in cases where an individual wants to keep the process of tax filing simple and does not have to keep track of the various investments and expenses he or she is allowed to deduct.
Which Tax Regime is Better for Income Above 15 Lakhs? Example
Mr. Arjun has a salary income of INR 18 lakhs. He is allowed HRA exemption of INR 1.2 lakhs, LTA exemption of INR 30,000 and Children's education and hostel allowance of INR 12,000. Profession tax of Rs 2,500 was deducted from his payslip. He has invested INR 1.5 lakhs in ELSS and made a voluntary contribution to NPS of Rs 60,000. He has also paid a medical insurance premium of INR 30,000 for his own family.
Here's how the tax calculation would look under both tax regimes:
Description | Old Regime (INR) | New Regime (INR) |
Total Income | 18,00,000 | 18,00,000 |
HRA Exemption | 1,20,000 | - |
LTA Exemption | 30,000 | - |
Children’s Education Allowance/Hostel Allowance | 12,000 | - |
Professional Tax Deduction | 2,500 | - |
Investment in ELSS | 1,50,000 | - |
Voluntary NPS Contribution | 60,000 | - |
Medical Insurance Premium | 30,000 | - |
Taxable Income | 14,95,500 | 18,00,000 |
Tax Calculation under Old Tax Regime:
Income Range | Tax Rate | Tax under Old Tax Regime |
Up to INR 2,50,000 | Nil | Nil |
INR 2,50,001 to INR 5,00,000 | 5% | 12,500 |
INR 5,00,001 to INR 10,00,000 | 20% | 1,00,000 |
Above INR 10,00,001 | 30% | 1,48,650 |
Total Tax Payable | 2,61,150 |
Tax Calculation under New Tax Regime:
Income Range | Tax Rate | Tax under New Tax Regime |
Up to INR 3,00,000 | Nil | Nil |
INR 3,00,001 to INR 6,00,000 | 5% | 15,000 |
INR 6,00,001 to INR 9,00,000 | 10% | 30,000 |
INR 9,00,001 to INR 12,00,000 | 15% | 45,000 |
INR 12,00,001 to INR 15,00,000 | 20% | 60,000 |
Above INR 15,00,000 | 30% | 90,000 |
Total Tax Payable | 2,40,000 |
Advantages of Each Regime
Advantages of the New Regime
The new tax regime offers several benefits that make it most appealing, especially to some classes of taxpayers:
Lower Rates: The new regime has revised tax slabs that offer lower tax rates for different levels of income, certainly an advantage to those who do not have heavy deductions.
Simplicity: As there are fewer exemptions and deductions to be considered, the new tax regime simplifies the process of filing tax returns. In this regard, it is an advantage in cases where the taxpayer prefers a smooth tax filing process without bothering about tracking and validating numerous deductions.
Less Paperwork: As a result of the streamlined approach in the new regime, the administrative burden on taxpayers is cut down to a minimum. With minimal deductions available, the paperwork and documentation for filing returns are substantially cut down.
Better for Those with Fewer Deductions: For taxpayers who do not normally have sufficient deductible expenses or investments to claim under the old regime, the new regime can yield a better tax outcome due to lower tax rates and a more simplified structure.
Benefits of the Old Regime
On the other hand, the old regime provides benefits that are more attractive for another category of taxpayers.
More Flexibility: The old regime provides lots of flexibility in tax planning because of various deductions and exemptions available. It may involve investments done in tax-saving instruments, housing loan interest, education loans, medical insurance, and so on.
Potential for High Tax Savings: There is definitely a possibility of savings in taxes for those who have planned their investments and expenditure. By maximizing the usage of various deductions and exemptions, taxpayers can save considerable amounts of tax.
Better for People with High Deductible Expenses: Those with considerable deductible expenses, such as home loan interest, higher education, or big health insurance premiums, are really benefited from the old regime since it could be used to reduce the taxable amount of income.
Promoting Investment: The old regime motivates the taxpayer to make specific investments or expenditures and get a deduction in tax, like ELSS, PPF, NPS, and so on. This helps in saving tax but also builds a corpus for future needs such as retirement, education, and health.
Decision-Making Strategies
An informed choice between the old and the new tax regime would go beyond the simple comparison of tax liabilities to something strategic and related to more holistic financial objectives. Here is how you can make this decision effectively:
Financial Planning Considerations
Align your tax planning with your financial goals: The first step in this regard will be to define your short- and long-term financial goals: be it asset accumulation, debt reduction, saving for retirement, or planning for your children's education. Depending upon these goals, the choice of tax regime can quite impact your financial flexibility. For example, if your aim is to save for retirement, you might be better off with deductions available under the old regime for investment in pension funds.
Retirement Planning: Consider how each regime would impact your retirement savings. The old regime could provide better advantages if you are maximizing contributions into retirement accounts, such as the NPS, with tax deductions. In contrast, if your retirement strategy is less reliant on traditional tax-saving instruments, the new regime's lower rates may mean increased take-home pay for more flexible investment choices.
Investment Plans: Assess how your investment plans fit into each of the tax regimes. If you invest heavily in tax-saving instruments under Section 80C, the old regime may be better. On the other hand, if you prefer investing in non-tax-advantaged assets, the new regime might offer better after-tax returns due to lower rates.
Annual Review and Adjustments
Importance of Yearly Evaluations: Regular review of your tax strategy, in view of recent legislation changes and personal changes, is essential. Be that a change in income, marital status, the addition of dependents, or a major change in investment goals.
Flexibility to Avail New Opportunity and Amendments: There are chances that the tax regime you have opted for might no longer serve your financial strategies and objectives. For example, the introduction of new tax-saving opportunities or the phasing out of older ones may make a difference in determining which regime will serve your purpose.
Consult with a Tax Professional: Due to the complications involved in projecting future financial situations and in understanding the impact of tax laws, consulting a tax expert or financial professional is advisable. They will be able to provide you with personalized advice regarding the latest tax laws and regulations and your updated financial status to make adjustments that optimize your position.
FAQ
Q1. What are the basic differences between the old and new tax regimes?
The old tax regime provides several deductions and exemptions, which can cut taxable income, whereas the new regime offers simplified, lower rates with fewer deductions.
Q2. Who should opt for the new tax regime?
Individuals with not much deductible expenses, such as interest on home loans or large investments in tax-saving schemes, could benefit from the new regime, thanks to its lower tax rates.
Q3. Will I be able to change my tax regime every year?
Salaried individuals can choose the regime at the time of filing returns every year. Self-employed persons can only change their regime once if they change the structure of their business.
Q4. What are the new tax regime tax rates for incomes over 15 lakhs?
The new tax regime has the same 30% tax rate for incomes over 15 lakhs as the old tax regime.
Q5. How does the availability of deductions impact tax regime choices?
If you have large deductions available, such as those under Section 80C, 80D, or on home loans, then the old regime will result in lower taxable income and lower tax liability.
Q6. Is the new tax regime simpler than the old tax regime?
Yes, the new tax regime is designed to be simpler, with fewer deductions and exemptions, which makes the tax filing process quicker and less complicated.
Q7. What if I have high medical expenses, which regime is preferable?
The old regime would be preferable if you have high deductible medical expenses as it allows for such deductions under Section 80D and 80DDB, which are not available in the new regime.
Q8. How should I decide which tax regime to opt for?
Consider your total deductible expenses, investment plans, and financial goals. Comparing the tax liability under both regimes after these considerations can help you make a decision.
Q9. What should someone with large charitable contributions consider?
If you make substantial charitable contributions, the old regime might be more beneficial as it allows deductions under Section 80G which are not available in the new regime.
Q10. How does the new tax regime affect retirement planning?
Under the new regime, many deductions related to retirement planning like NPS (under Section 80CCD) are not available. This might impact those who heavily rely on such deductions for tax planning.
Q11. Can changes in income affect which tax regime is better?
Yes, fluctuations in income and changes in investment or deduction eligibility can make a difference as to which regime is more tax-efficient in any given year.
Q12. Should I consult a tax advisor in deciding between the tax regimes?
It's highly recommended, especially for those with complex financial portfolios or those who are not quite sure of how the deductions and exemptions apply to their individual circumstances to consult a tax expert.
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