Ashwath works for a Corporate with a sizeable pay package. He recently purchased a flat in Bengaluru with a housing loan from a nationalised bank and let it out for rent. He had sold some shares during the previous financial year which resulted in some capital gains. While computing tax on his income, Ashwath realises that both the old regime and the new regime gives him almost the same return. Infact the new regime gives him a marginal tax saving. Should Ashwath opt for the new or the old tax regime?
CONTEXT:
Finance Budget 2020 introduced the New Tax Regime (Sec 115BAC) with an aim to cater to the Gen Z, who believe that “tax saved” need not necessarily means “money saved / earned”!
One can claim various deductions and exemptions by setting aside money in specified investments and opt for the old tax regime which have higher slab rates. Alternatively, the new tax regime allows the taxpayer to get beneficial tax slab rates in exchange for not claiming the deductions and exemptions.
TIP OF THE ICEBERG !
A tax payer, who does not have income from business or profession has an option to switch between regimes every year. Hence from a layman’s point of view, it’s just a number game. Choose the option with a lower tax liability / higher refund. This is seems quite straight forward. But when you read between lines of the “ifs” and “buts” of the Income Tax provisions, you understand that there is more to it.
ELEPHANT IN THE ROOM:
In Ashwath’s case, it’s a close call between the old and the new regime. What does he loose if he chooses the new regime and pays a lower tax ?
The big elephant in the rooms is the interest on his housing loan of the let out property. We all know that the interest component is the larger pie of the housing loan repaid in the first few years. Under the old tax regime, one gets the benefit of carrying forward the loss from house property and set it off against future rental income. This key benefit is lost if one opts for the new tax regime.
Hence Ashwath must choose the old tax regime for the current year, keeping in mind the future benefits of his current choice!
BREAKEVEN POINT – A MIRAGE?
Choosing the regime is not a mere number game and don’t’ get swayed away by the “magic number” promise for the choice of regime. There are multiple factors based on which one must decide the course of action as “one size doesn’t fit all!”
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