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

For incomes up to ₹7.5 lakh, the new tax regime is the clear choice, offering a rebate after ₹50,000 deduction

Tshipra.singh@livemint.com

axpayers have until 30 April to decide whether they want to opt out of the default new tax regime and instead select the old tax scheme for the current financial year. Not doing so would mean that tax at source will be deducted for salaried individuals as per the tax slabs applicable under the new scheme.

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 (see graphic).

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 80C 80D

Ŕ1.5 lakh in PPF

Medical insurance premium

Apart from PPF, no other tax-saving investment avenue except NPS Doesn't have home loan

Lives in own house, so no rent to deduct

Income (in ₹) upto 7.5 lakh 8 lakh 9 lakh 10 lakh 11 lakh 12 lakh 13 lakh 14 lakh 15 lakh 15.5 lakh to 5 crore ₹21,000 less tax outgo in new tax scheme

Breakeven deduction limit no tax under new regime*

Ŕ2,12,500 Ŕ2,62,500 Ŕ3,00,000 Ŕ3,25,000 Ŕ3,50,000 Ŕ3,62,500 Ŕ3,75,000 Ŕ4,08,333 Ŕ4,25,000

80C

LTA

EPF, term insurance, ELSS

Live with parents, no HRA to claim Don't want to invest in NPS only to save tax

Don't pay parents rent just for tax-saving Apart from lower tax rates, find new regime easy to understand and less cumbersome

Popular tax-breaks

80C** Health insurance 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

If your deductions and exemptions exceed the breakeven threshold, the old regime is better

Ŕ1,50,000 Ŕ25,000

₹1.2 lakh tax will be saved under new regime

Those using only employer insurance can't claim this Ŕ1,75,000+Ŕ50,000 standard deduction

= Ŕ2,25,000

Key points to know about the new regime can switch regimes each year. with business income (includes freelancers, traders), can switch back to old regime only once. get Ŕ50,000 standard deduction.

on home loan interest on a rented house available. from house property can not be set-off against any income except income from house property.

Big expenditures Home loan HRA ₹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 ave

Ŕ2 lakh

Depends on pay structure and rent paid nue 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-yearold. 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.

One of the convenient avenues of investing abroad is mutual funds

nvestment in global equity is one of the avenues for diversifying your portfolio. While India is the growth story of this century and thus should have a greater allocation in your portfolio, there are certain arguments in favour of global investments as well. One is that it helps you to diversify your exposure to other economies and markets. The other reason is that it helps you benefit from the depreciation of the rupee. When you invest, the exchange rate is at a certain level. And when you redeem the investments, if the rupee has depreciated against, say, the US dollar, you get a higher converted value.

There are multiple ways of investing abroad. One of the convenient avenues of doing so is mutual funds (MFs). There are fund of funds (FoFs) that invest in one or more funds, thus making the underlying fund(s) available to the investor of the FoF. There are Exchange Traded Funds (ETFs) that are listed at stock exchanges in India—the National Stock Exchange and BSE, which invest in stocks abroad.

There are also index funds available in India that invest in stocks abroad. Index funds are so called since the funds follow the designated index and the fund manager does not take any active decision in fund management. However, now that there are overall limits, i.e.$7 billion for investment in overseas securities and another $1 billion for ETFs, there is a lid on MFs. The limit of $7 billion for funds was hit on 1 February 2022 and has not been raised by the Reserve Bank of India, the banking regulator, since then. FoFs that invest in ETFs listed on foreign exchanges will have to stop accepting fresh investments from 1 April 2024.

However, you can invest in global stocks directly. NSE International Exchange (NSE IFSC) and BSE International Exchange (INX) have trading facilities on their IFSC platforms in GIFT City, Ahmedabad. Global (US) stocks, i.e. select leading stocks, are listed at NSE IFSC at Gujarat International Finance Tec-City (GIFT).

Investors can invest or trade in a fraction of a stock— this is possible as it is in the form of depository receipts (DR) of the stocks. Investors can hold the DRs in their demat account opened in GIFT City. The price of the stocks in Indian rupee would be on the higher side, due to the currency conversion rate. The way it works is that you can buy, not the stock directly, but an IFSC receipt, which is a negotiable financial instrument in the nature of a DR. The US stock is the underlying asset, and the receipt represents a fractional ownership of one stock.

Let us take an illustration. Let us say, you have a positive view on Apple, the US technology giant, and want to take exposure to its stock. The price of the stock is say, 171. But this is 171 US dollars. At a conversion rate of, say, 83, the price per share of Apple would be approximately₹14,000. The price of one DR with Apple as underlying at NSE IFSC is, say, $6.8. At a conversion rate of 83, it is approximately ₹564. Hence you are buying approximately 4% of a single stock of Apple, with commensurate benefits in price appreciation, dividends, etc.

Investments in stocks abroad will be part of India’s Liberalized Remittance Scheme (LRS) of $250,000 per financial year. At an exchange of 83 to the dollar, it is a limit of ₹2.07 crore per financial year.

Apart from NSE IFSC, there are global brokerage platforms with presence in India where you can open an account, get your money converted from rupee to dollar or any other relevant currency, deposit the dollars in your account, and invest in global stocks—US or other markets.

So far so good. In any investment vehicle, for e.g. MF or Portfolio Management Services (PMS) or Alternative Investment Funds (AIF), there is a professional fund management team. If you are a do-it -ourself (DIY) investor, you may not have the bandwidth to analyse stocks and manage your portfolio. Hence, you may need to go through a wealth manager with global capabilities, one who can guide you and with whom you can have an interaction on the global stock selection rationale.

Taxation of global stocks is akin to that of unlisted shares, as these are not listed on any stock exchange in India. Over a holding period of two years, it is eligible for long term capital gains (LTCG) taxation. The taxation rate for LTCG is 20% with the benefit of indexation.