Picking the Right Tax Regime Over a Cup of Coffee

It was a chilly December morning, and Manish sat at his favourite coffee shop, lost in thought. His financial advisor had just asked him a question that felt surprisingly heavy: “Old tax regime or new tax regime?” What seemed like a simple choice turned into a reflection of how Manish wanted to manage his money and future.

Manish’s thoughts meandered to the tools he had always relied on to make smart financial decisions, one of which was his trusted ELSS (Equity Linked Savings Scheme). This investment, offering both tax benefits and growth potential, seemed to embody the very dilemma he faced, sticking with the tried-and-tested or embracing something new.

If you've ever faced this dilemma, you know it’s not just about taxes, it’s about aligning your finances with your goals. Let’s dive into this question with Manish’s story in mind.

The Old vs. New Tax Regime: What’s the Difference?

The old tax regime, prevailing before the introduction of the new regime, is like the classic Bollywood blockbuster—familiar, intricate, and rewarding for those who follow its rhythm. With several deductions available, including popular ones like Section 80C (₹1.5 lakh), HRA, LTA, and more, it’s designed for taxpayers who prefer to save and invest strategically.

The new tax regime, introduced to simplify the process, is like a breezy modern Netflix series. Lower tax rates across relatively higher income slabs fewer complications, and more liquidity define its appeal. As of FY 2024-25, the new regime is the default choice, but taxpayers can opt for the old regime at the time of furnishing their annual Income Tax Returns (ITRs) if it suits them better. In case the taxpayers have income from business / profession, they must mandatorily submit Form 10-IEA before the due date and filing of ITR to switch their tax regime from new to old or if they want to re-enter in the new scheme. This form can be filed twice in lifetime i.e. one for opt out of new tax regime and one for re-entering into the new tax regime.

Here’s a detailed comparison of the tax slabs under both regimes for FY 2022-23, FY 2023-24, and FY 2024-25:

New Provisions in the New Tax Regime

• Standard Deduction: - Starting FY 2024-25, the standard deduction has been increased from ₹50,000 to ₹75,000 for salaried taxpayers filing their ITRs under the new tax regime.

• Family Pension Deduction: Earlier the deduction was lower of 1/3rd of such income or ₹15,000, which has been increased to lower of 1/3rd of such income or ₹25,000under the new regime for FY 2024-25.

• Reduced Surcharge for High-Income Earners: For individuals earning over ₹5 crores, the surcharge under the new tax regime is 25% as opposed to 37% in the old tax regime, thus the effective tax rate on highest income earners under new tax regime is 39% as opposed to 42.74% under the old regime.

• Higher Leave Encashment Exemption: The exemption limit for leave encashment at the time of retirement for non-government employees has been raised from ₹3 lakh to ₹25 lakh with effect from 1 April 2023.

Who Should Choose What and Why?

Stick with the Old Regime if...

1. You’re investing in ELSS, PPF, or insurance.
o The old regime offers significant tax savings through deductions like Section 80C. If you’re investing strategically in these instruments, the old regime rewards your discipline.

2. You have a home loan with significant interest payments.
o The old regime allows deductions of up to ₹2 lakh on home loan interest under Section 24(b), which can result in substantial tax savings.

3. You prefer a structured approach to long-term savings.
o With provisions for education loans, medical expenses, and more, the old regime encourages financial planning.

Go with the New Regime if...

1. You’re just starting your career.
o The simplicity of the new regime means fewer investment obligations, letting you keep more cash in hand.

2. You have fluctuating income.
o Freelancers or gig workers benefit from the flexibility of no mandatory tax-saving investments.

3. You’re a high-income earner without significant deductions.
o The reduced surcharge makes the new regime especially attractive for high-net-worth individuals.

Why ELSS Remains a Star Player

No matter which tax regime you choose, ELSS remains a valuable tool for growing your wealth. Under the old regime, its tax-saving feature under Section 80C makes it a go-to choice for disciplined investors. With a short lock-in period of just three years, it offers liquidity and potential higher returns compared to traditional investment options and meet your long-term financial goals.

Even in the new regime, where tax-saving isn’t the primary concern, ELSS shines. Its potential for wealth creation (potential long-term equity returns), coupled with systematic investment options through SIPs (Systematic Investment Plans), makes it a smart choice for long-term financial goals.

Manish’s Decision

By the end of his coffee, Manish had his answer. With a home loan, ELSS investments, and a structured saving habit, the old regime suited his needs perfectly. But he also realized the importance of revisiting this choice yearly as his financial goals evolve.

The choice between the old and new tax regimes is personal, much like Manish’s cappuccino preference. Take a moment to evaluate your expenses, investments, and financial goals. Whether you lean towards the traditional old regime or the modern new one, the key is to make an informed decision.

And remember, a good cup of coffee can make even the toughest financial decisions a little easier.