No home loan or HRA? The old tax scheme may not be right for you

Individuals should make the choice between the two schemes depending on the one that offers the lowest tax outgo, say financial experts. Nitesh Buddhadev, founder, Nimit Consultancy, said the new tax scheme, post the changes introduced in Budget 2022, could be favourable for many taxpayers. These key changes include a tax rebate on up to ₹7 lakh income, ₹50,000 standard deduction for salaried individuals and lower tax rates. “The government has structured the new scheme in a way that the tax outgo is either low or at par with the old scheme unless the taxpayer is claiming substantial tax deductions and exemptions," he said.

For net incomes up to ₹7.5 lakh, the new tax regime is the straightaway choice as you get the tax rebate after claiming the ₹50,000 deduction. Mint has compiled a break-even amount for different income levels applicable to taxpayers below 60 years of age.

If your total tax deductions and exemptions are above the breakeven threshold, the old regime works better for you. For instance, for income of ₹8 lakh, you need to avail deductions and exemptions of over ₹2.13 lakh to be above the threshold.

Similarly, for ₹10 lakh income level, one needs to avail ₹3 lakh worth of tax breaks. Now, this can not be availed with just the standard deduction and the ₹1.5 lakh tax breaks available under the popular section 80C, which contains a wide range of expenses, including tuition fees of up to two children, stamp duty on purchasing a house and term insurance premiums, as well as investments towards provident fund (PF) and Equity Linked Savings Scheme (ELSS). In fact, even if taxpayers in this income bracket claim an additional ₹50,000 deduction from their contributions to the National Pension Scheme or NPS (under Section 80CCD(1B)) along with ₹25,000 towards health insurance premium (under section 80D), they will still fall short by ₹25,000.

The tax-breaks that an individual needs to reach the break-even threshold increases with higher income levels and this goes up to ₹4.25 lakh for incomes from ₹15 lakh to ₹5 crore.

The usual ₹1.5 lakh under section 80C and medical insurance premium will not suffice to claim deductions to the tune of ₹3 lakh or more. The breakeven threshold can be achieved only if the taxpayer has big expenditures like a housing or education loan or rent and can claim HRA (House Rent Allowance) on it. Section 24 of the income tax Act allows homeowners to claim a deduction of up to ₹2 lakh on the interest portion of their home loan taken for a self-occupied property. The entire interest is deductible if the house is let out on rent, but this benefit is also allowed under the new tax scheme.

On an education loan, the entire interest paid in a year can be claimed as deduction under section 80E.

Benefit of HRA is available to only the salaried provided it is part of their cost-to-company (CTC) package. Business owners, professionals or salaried people who don’t have HRA as part of their salary package can claim up to a maximum ₹60,000 deduction on rent under section 80GG.

For instance, take the case of Mumbai-based Mandar Salunkhe who switched to the new tax regime this year as he was availing tax deductions only under section 80C by investing in Public Provident Fund (PPF). He is a full-time investor and falls in the 30% tax bracket (income over ₹15 lakh). His income consists of dividends from stocks and mutual fund (MFs) investments, capital gains from MFs if he sells any, and interest income from bonds. Salunkhe doesn’t have any loans and lives in his own house.

“The only other investment avenue apart from 80C is NPS. Even by doing that, I would have still saved more tax under the new scheme, so I decided to switch," said the 49-year-old. This year onwards, he will save ₹21,000 more in taxes after moving to the new regime. “I will still continue the PPF investment as there are relatively very few fixed-income options that give a post tax return of about 8%. For me, it’s the debt component in my portfolio and not just a tax-focused investment."

Salunkhe is right. Under the old regime, several taxpayers followed an aggressive tax-saving plan with the focus to minimise their tax outgo. This includes investing in PF, ELSS, investment cum insurance plans, or NPS merely for the tax incentives that the regime offers even if it doesn’t align with their financial goals. Some may even buy health or life insurance even if they don’t need it. The new regime, on the other hand, takes away these compulsions.

Prashant Navin Gupta is a case in point. He is happy to be in the new scheme as it is easier to understand and is less cumbersome for him. “I don’t have to align my investments to save taxes and instead I can invest to optimize returns rather than save taxes. All those tax saving instruments were old school and didn’t give good returns," said the 35-year-old, who has an equity focused investment portfolio.

As for HRA and LTA (Leave Travel Allowance), Gupta—a salaried professional—said he doesn’t find the documentation process worth the tax-saving effort. “I don’t like the hassles involved in claiming LTA. As for HRA, I live with my parents. I can pay them rent to claim HRA but I don’t want to block my funds just to save tax," said the management consultant.

Chartered accountant Karan Batra pointed out that paying rent to a parent is useful only if it doesn’t increase the latter’s tax liability.

After the new tax scheme was modified in 2023, it is increasingly finding more takers. Batra informed Mint that about 40% of his clients are now under the new regime, up from 10% last year. Buddhadev corroborated the trend and said the number of his clients under the new regime has doubled this year compared to last year. After the new tax scheme was modified in 2023, it has found more takers. Sambhav Daga, a practising chartered accountant said about 80-85% of his clients without a business income have moved to the new scheme in the current financial year. Remaining 15-20% people are sticking to the old regime because they have a running home loan. “Home loan is the real deal breaker. Without it, there’s not much incentive in the old regime," he said.

Moreover, salaried individuals have the option to switch between the two tax regimes each year, which gives them the flexibility to not make aggressive tax-saving investments while being able to opt for the old regime if they do take up a home loan or see increased rent outgo in the future. However, those with business income can move between the two regimes only once in their lifetime. “For this reason, most professionals or business owners are still sticking to the old regime," said Buddhadev.

As for the decision between the two regimes, Prakash Hegde, chartered accountant, Acer Tax & Corporate Services, said he would advise all salaried individuals to opt for the old regime for the time being. “A taxpayer will know about the final tax deductions or exemptions they will claim only at the end of the year. Say, they could take a home loan or move to a rented accommodation in the middle of the fiscal year," he said.

At the time of filing the tax return, salaried taxpayers can opt for a different regime from the one they chose at the start of the financial year.