New Tax Regime Vs Old Tax Regime
INTRODUCTION
Income-tax is a tax levied and collected by the Central Government on income of a person. Income-tax is calculated at specified rates on total income of a person and paid directly to the Central Government. The provisions relating to the income-tax are governed by the Income-tax Act, 1961.
A tax return is a form(s) filed with a taxing authority that reports income, expenses and other pertinent tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes.
INCOME TAX SLABS FOR FY 2020-21
The income earned individuals will determine the income tax slabs under which they fall. The lower the income, the lower the tax liability, and those who earn less than Rs.2.5 lakh p.a. are exempt from tax.
The Finance Minister introduced new tax regime in Union Budget announced on the 1st February 2020, wherein there is an option for individuals and HUF (Hindu Undivided Family) to pay taxes at lower rates without claiming deductions under various sections or file their taxes as per the old regime.
NEW TAX REGIME VS. OLD TAX REGIME
| Income Tax Slab | Tax Rates As Per New Regime (Optional) | Tax Rates As Per Old Regime |
| ₹0 – ₹2,50,000 | Nil | Nil |
| ₹2,50,001 – ₹ 5,00,000 | 5% | 5% |
| ₹5,00,001 – ₹ 7,50,000 | ₹12500 + 10% of total income exceeding ₹5,00,000 | ₹12500 + 20% of total income exceeding ₹5,00,000 |
| ₹7,50,001 – ₹ 10,00,000 | ₹37500 + 15% of total income exceeding ₹7,50,000 | ₹62500 + 20% of total income exceeding ₹7,50,000 |
| ₹10,00,001 – ₹12,50,000 | ₹75000 + 20% of total income exceeding ₹10,00,000 | ₹112500 + 30% of total income exceeding ₹10,00,000 |
| ₹12,50,001 – ₹15,00,000 | ₹125000 + 25% of total income exceeding ₹12,50,000 | ₹187500 + 30% of total income exceeding ₹12,50,000 |
| Above ₹ 15,00,000 | ₹187500 + 30% of total income exceeding ₹15,00,000 | ₹262500 + 30% of total income exceeding ₹15,00,000 |
*There is an additional 4% Health & Education Cess that needs to be paid on every front.
* Full tax rebate with a taxable income bracket of up to ₹ 5, 00,000/-
Under the old regime, the tax slabs and rates are kept unchanged as declared in last year’s Budget. New tax regime slab rates are not differentiated based on age group. However, under old tax regime the basic income threshold exempt from tax for senior citizen (aged 60 to 80 years) and super senior citizens (aged above 80 years) is ₹ 3 lakh and ₹ 5 lakh respectively. Any individual opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions. Hence, the tax benefit would be based on the facts and case-specific.
Here is the list of exemptions and deductions that a taxpayer will have to give up while choosing the new tax regime.
- Leave Travel Allowance (LTA)
- House Rent Allowance (HRA)
- Conveyance
- Daily expenses in the course of employment
- Relocation allowance
- Helper allowance
- Children education allowance
- Other special allowances [Section 10(14)]
- Standard deduction on salary
- Professional tax
- Interest on housing loan (Section 24)
- Chapter VI-A deduction (80C,80D, 80E and so on) (Except Section 80CCD(2) and 80JJA)
- Savings bank interest
Some tax exemptions have been left untouched, what stays from old regime includes.
- Standard deduction on rent
- Agricultural income
- Income from life insurance
- Retrenchment compensation
- VRS proceeds
- Leave encashment on retirement
FEW POINTS TO REMEMBER WHILE OPTING FOR NEW TAX
- In light of the above and considering the new personal tax regime wherein certain deductions and exemptions would not be applicable in case of taxpayers opting for concessional new tax regime, the taxpayers may evaluate both the regimes. Any taxpayer, who is looking for flexibility in the investment choices and does not want to invest in the specified eligible instruments, may consider opting for the new tax regime. However, it is advisable to do a comparative evaluation under both the regimes. The income tax department has brought out a tax comparison utility, which is available on their web portal and in which, an individual taxpayer can evaluate which option is better for them. The link to which is as under: https://www.incometaxindiaefiling.gov.in/Tax_Calculator/
- Option to be exercised on or before the due date of filing return of income for AY 2021-22
- It is notable that, the choice can be exercised every year and any regime which is beneficial can be adopted by the individual (except for those who have income from business or profession). Individuals who have income from business or profession cannot switch between the new and old tax regimes every year. If they opt for the new taxation regime, such individuals get only one chance in their lifetime to go back to the old regime. Further, once switched back to existing tax regime, they will not be able opt for new tax regime unless their business income ceases to exist.
- Surcharge has remained unchanged in both the regimes. 10% for income between Rs 50 lakh and Rs 1 crore, 15% for income between Rs 1 crore and Rs 2 crore, 25% for income between Rs 2 crore and Rs 5 crore and 37% for income exceeding Rs 5 crore.
COMPARISON OF NEW INCOME TAX REGIME WITH OLD TAX REGIME
Based on the below illustrative table 1, it is evident that the maximum benefit which can be availed under the new regime (in case no investments are made) is Rs 75,000 in terms of tax savings. As a result, unlike the corporate tax concessional tax rate regime which reduces tax rates across income levels, the concessional tax rate has limited application and will benefit persons in the lower income brackets. It is clear from the illustration that new regime is beneficial when no investments are done; due to lower slab rates tax payable is computed to be lesser than old regime.
ILLUSTRATION 1:
Tax liability (Rs.) (excluding surcharge & education cess)
| Annual Income | As per New Regime | As per Existing Regime* | Benefit as per the new Regime | ||
| Slab rates % | As per New Regime (No deduction/ exemption available) |
Slab rates % | As per Existing Regime (Deduction/ exemption available, but not considered) |
||
| 2,50,000 | – | – | – | – | – |
| 5,00,000 | 5%** | – | 5%** | – | – |
| 7,50,000 | 10% | 37,500 | 20% | 62,500 | 25,000 |
| 8,00,000 | 15% | 45,000 | 20% | 72,500 | 27,500 |
| 10,00,000 | 15% | 75,000 | 20% | 112,500 | 37,500 |
| 12,50,000 | 20% | 125,000 | 30% | 187,500 | 62,500 |
| 15,00,000 | 25% | 187,500 | 30% | 262,500 | 75,000 |
| 50,00,000 | 30% | 1,237,500 | 30% | 1,312,500 | 75,000 |
| 75,00,000 | 30% | 1,987,500 | 30% | 2,062,500 | 75,000 |
| 1,00,00,000 | 30% | 2,737,500 | 30% | 2,812,500 | 75,000 |
| 1,50,00,000 | 30% | 4,237,500 | 30% | 4,312,500 | 75,000 |
| 2,00,00,000 | 30% | 5,737,500 | 30% | 5,812,500 | 75,000 |
| 3,50,00,000 | 30% | 10,237,500 | 30% | 10,312,500 | 75,000 |
| 5,00,00,000 | 30% | 14,737,500 | 30% | 14,812,500 | 75,000 |
| 5,50,00,000 | 30% | 16,237,500 | 30% | 16,312,500 | 75,000 |
*Basic exemption income slab in case of a resident individual of the age of 60 years or more (senior citizen) and resident individual of the age of 80 years or more (very senior citizens) at any time during the previous year, continues to remain the same at Rs 3 lakh and Rs 5 lakh, respectively, in the existing tax regime.
**No tax up to Rs. 500,000 taxable income, as Rebate under section 87A is available.
ILLUSTRATION 2:
In theory, the new regime with lowered rates and lesser complications may seem attractive to taxpayers. However, considering the overall tax benefits a person can avail under current exemptions and deductions, they will pay a higher tax amount overall under different slabs
Even with a higher tax rate, considering the most common deductions and exemptions, a taxpayer will pay a lower tax amount overall as per the old regime.
Analysis of tax benefits / loss to the taxpayers with housing loan deduction hats off the intelligence of FM
| Old Rate | New Rate | Tax Benefits | |
| Total Income | 7,50,000.00 | 7,50,000.00 | |
| Less: Housing Loan Interest | (2,00,000.00) | – | |
| Deduction u/s 80C | (2,00,000.00) | – | |
| Deduction u/s 80D | (25,000.00) | – | |
| Taxable Income | 3,75,000.00 | 7,50,000.00 | |
| Taxable Payable | 37,000.00 | (37,500.00) | |
| Total Income | 10,00,000.00 | 10,00,000.00 | |
| Less: Housing Loan Interest | (2,00,000.00) | – | |
| Deduction u/s 80C | (1,50,000.00) | – | |
| Deduction u/s 80D | (25,000.00) | – | |
| Taxable Income | 6,25,000.00 | 10,00,000.00 | |
| Taxable Payable | 37,000.00 | 75,000.00 | (37,500.00) |
| Total Income | 12,00,000.00 | 12,00,000.00 | |
| Less: Housing Loan Interest | (2,00,000.00) | – | |
| Deduction u/s 80C | (1,50,000.00) | – | |
| Deduction u/s 80D | (25,000.00) | – | |
| Taxable Income | 8,25,000.00 | 12,00,000.00 | |
| Taxable Payable | 77,500.00 | 1,15,000.00 | (37,500.00) |
| Total Income | 15,00,000.00 | 15,00,000.00 | |
| Less: Housing Loan Interest | (2,00,000.00) | – | |
| Deduction u/s 80C | (1,50,000.00) | – | |
| Deduction u/s 80D | (25,000.00) | – | |
| Taxable Income | 11,25,000.00 | 15,00,000.00 | |
| Taxable Payable | 1,50,500.00 | 1,87,500.00 | (37,500.00) |
| Total Income | 17,50,000.00 | 17,50,000.00 | |
| Less: Housing Loan Interest | (2,00,000.00) | – | |
| Deduction u/s 80C | (1,50,000.00) | – | |
| Deduction u/s 80D | (25,000.00) | – | |
| Taxable Income | 13,75,000.00 | 17,50,000.00 | |
| Taxable Payable | 2,25,000.00 | 2,62,500.00 | (37,500.00) |
In the above illustration 2, an individual with the maximum amount of reduction in tax liabilities through housing loan interest, exemptions under 80C and 80D, as per the old regime, will end up paying ₹37,500 more if they choose to go with the new scheme. The new regime may seem preferable to some, especially first-time taxpayers considering the simplified nature of the tax slabs. Another important aspect to be considered while comparing the two regimes is the immediate cash-flow for the taxpayers. To avail the benefits of the old regime which in theory does lead to a lower payable tax amount, we must consider the cash crunch caused when money is invested in different schemes to avoid tax liability.
The taxpayer avails the benefits of these investments after a year when they file their returns. Hence, the new scheme may appear attractive to some as they pay only the tax amount every month as compared to having their money blocked in investments for a year.
“However, considering the deductions and exemptions provided in the old regime, in the long-term, a taxpayer would indeed end up paying a higher tax amount in the new regime as compared to the old regime and also old regime encourages investments which led to savings for any future eventuality like marriage, education, purchase of house property, medical, etc
IMPACT ON TAXPAYERS
Here’s how the new tax regime & old tax regime will affect the tax outgo of taxpayers at different income levels. The illustrations also show the benefits of investments and availing deductions under old regime to lower the tax liability at higher income level.
ILLUSTRATION 3:
Income: Rs 15 lakh
| Old regime (without deduction) | Old regime (with deduction) | New regime | |
| Income | ₹15 lakh | ₹15 lakh | ₹15 lakh |
| Deduction / exemptions | Nil | ₹2,00,000 | Nil |
| Taxable Income | ₹15,00,000 | ₹13,00,000 | ₹15,00,000 |
| Tax | ₹2,62,500 | ₹2,02,500 | ₹1,87,500 |
| Cess@4% | ₹10,500 | ₹8,100 | ₹7,500 |
| Total tax | ₹2,73,000 | ₹2,10,600 | ₹1,95,000 |
* Deductions assumed: Rs 1.5 lakh under Sec 80C; Rs 50,000 Standard deduction
It is clear from this illustration that on income 15 lakh and after considering deductions, due to lower slab Rate at the respective income level, new regime can Benefit the individuals
Income Rs. 30 lakh
| Old regime (without deduction) | Old regime (with deduction) | New regime | |
| Income | ₹30 lakh | ₹30 lakh | ₹30 lakh |
| Deduction / exemptions | Nil | ₹4,25,000 | Nil |
| Taxable Income | ₹30,00,000 | ₹25,75,000 | ₹30,00,000 |
| Tax | ₹7,12,500 | ₹5,85,000 | ₹6,37,500 |
| Cess@4% | ₹28,500 | ₹23,400 | ₹25,500 |
| Total tax | ₹7,41,000 | ₹6,08,400 | ₹6,63,000 |
Deductions for Rs 30 lakh,: Rs 1.5 lakh under Sec 80C; Rs 50,000 standard deduction; Rs 25,000 under Sec 80D; Rs 2 lakh home loan interest under Sec 24.
It is clear from this illustration that on income level Rs. 30 lakh and after considering deductions, old regime benefits more to individuals when compared to new regime.
Income: Rs 60 lakh
| Old regime (without deduction) | Old regime (with deduction) | New regime | |
| Income | ₹60 lakh | ₹60 lakh | ₹60 lakh |
| Deduction / exemptions | Nil | ₹4,25,000 | Nil |
| Taxable Income | ₹60,00,000 | ₹55,75,000 | ₹60,00,000 |
| Surcharge | ₹1,61,250 | ₹1,48,500 | ₹1,53,750 |
| Tax | ₹17,73,750 | ₹16,33,500 | ₹16,91,250 |
| Cess@4% | ₹70,950 | ₹65,340 | ₹67,650 |
| Total tax | ₹18,44,700 | ₹16,98,840 | ₹17,58,900 |
Deductions for Rs 60 lakh: Rs 1.5 lakh under Sec 80C;
Rs 50,000 standard deduction; Rs 25,000 under Sec 80D; Rs 2 lakh home loan interest under Sec 24. And Surcharge 10%
It is clear from this illustration that on income level Rs. 60 lakh and after considering deductions, old regime benefits more to individuals when compared to new regime.
Income Rs. 1.2 Crore
| Old regime (without deduction) | Old regime (with deduction) | New regime | |
| Income | ₹1.2 Crore | ₹1.2 Crore | ₹1.2 Crore |
| Deduction / exemptions | Nil | ₹4,25,000 | Nil |
| Taxable Income | ₹1,20,22,000 | ₹1,15,75,000 | ₹1,20,00,000 |
| Surcharge | ₹5,11,875 | ₹4,92,750 | ₹5,00,625 |
| Tax | ₹39,24,375 | ₹37,77,750 | ₹38,38,125 |
| Cess@4% | ₹1,56,975 | ₹1,51,110 | ₹1,53,525 |
| Total tax | ₹40,81,350 | ₹39,28,860 | ₹39,91,650 |
Deductions for Rs 1.2 Crore: Rs 1.5 lakh under Sec 80C;
Rs 50,000 standard deduction; Rs 25,000 under Sec 80D;
Rs 2 lakh home loan interest under Sec 24. And Surcharge 15%
It is clear from this illustration that on income level Rs. 60 lakh and after considering deductions, old regime benefits more to individuals when compared to new regime.
CHAPTER VI- A DEDUCTIONS AT A GLANCE
Below are few chapter VI- A deductions which can be availed by the individuals, if they opt for old regime. These investments not only helps to avail tax deductions but also secures the money to meet some unforeseen or future events and ultimately reduced tax liability which in turns result in more liquidity in the hands of taxpayers.
| Particulars | Income Tax Deduction for FY 2019-20 (AY 2020-21) | Who can Invest? | Limit for FY 2019-20 (AY 2020-21) |
| Section 80C | Investing into very common and popular investment options like LIC, PPF, Sukanya Samriddhi Account, Mutual Funds, FD etc | Individual Or HUF |
Up to Rs 1,50,000 |
| Section 80CCC | Investment in Pension Funds | Individuals | |
| Section 80CCD (1) | Atal Pension Yojana and National Pension Scheme Contribution | Individuals | |
| Section 80CCD(1B) | Atal Pension Yojana and National Pension Scheme Contribution | Individuals | Upto Rs 50,000 |
| Section 80D | Medical Insurance Premium and Medical Expenditure | Individual Or HUF |
Upto Rs 1,00,000 |
| Section 80DD | Medical Treatment of a Dependent with Disability | Individual Or HUF |
Normal Disability: Rs 75000/- Severe Disability: Rs 125000/- |
| Section 80DDB | Specified Diseases | Individual Or HUF |
Senior Citizens: Upto Rs 1,00,000 Others: Up to Rs 40,000 |
| Section 80E | Interest paid on Loan taken for Higher Education | Individual | 100% of the interest paid up to 8 assessment years |
| Section 80G | Donation to Charitable Institutions | All Assesses (Individual, HUF, Company etc) | 100% or 50% of the Donated amount or Qualifying limit, Allowed donation in cash up to Rs.2000/- |
| Section 80TTA | Interest earned on Savings Accounts | Individual Or HUF (except senior citizen) |
Up to Rs 10,000/- |
| Section 80TTB | Interest Income earned on deposits(Savings/ FDs) | Individual (60 yrs or above) | Up to Rs 50,000/- |
| Section 80U | Disabled Individuals | Individuals | Normal Disability: Rs. 75,000/- Severe Disability: Rs. 1,25,000/- |
Therefore, the most common type of tax benefit comes in the form of a tax deduction. When you claim a tax deduction, it reduces the amount of your income that is subject to tax. The amount of the deduction you are eligible to claim is precisely the amount of the reduction to your taxable income. The Income Tax Act, 1961, provides taxpayers with several options to reduce their tax payable. Various sections offer tax deductions, out of which Section 80C is the most popular. Amongst exemption, claiming HRA is the widely used exemption. The best way to save taxes is to lay out a financial plan, compare the best available regime in order to reduce tax burden and invest accordingly.
THE PROS OF THE OLD REGIME
- The older regime by enforcing investments in specified tax-saving instruments, over the period inculcated the savings culture in individual and led to savings for any future eventuality like marriage, education, purchase of house property, medical, etc.
- The Old regime leads to low tax liability on individuals as compared to new regime in long run, by doing all the investments as explained above which benefits them in future, they can avail benefit of deductions and ultimately reduce their tax liability. The outcome can be more liquidity in hands and secure investments for future endeavours.
- India’s gross savings rate was approximately 30 % in March 2019 and the domestic savings by individuals is a significant contributor to the overall savings rate. If more individuals will opt for the new regime, the savings rate would decrease, nevertheless the consumption cycle and demand would be revived.
THE CONS OF THE OLD REGIME
- The tax benefit under the old regime is available on investments in specified instruments. This may not be not a suitable tax-saving option for millennial, who prefer to spend than saving, and senior citizens, as they would prefer having liquidity in their hands and investing in instruments which have a flexible and open-ended tenure.
- In case of assessment proceedings before the tax authorities, documentation and proof of investments is required to be retained in the old regime, which may not be required in the new regime.
THE PROS OF THE NEW REGIME
In Short Run, there might be many pros of New Regime. The pros of the new regime are as follows:
- Reduced Tax rates and reduced compliances
The new regime provides for concessional tax rates vis-à-vis tax rates in the existing or old regime. Further, as most of the exemptions and deductions are not available, the documentation required is lesser and the tax filing is easier. - Investor may not prefer to lock-in funds in the prescribed instruments for the specified period
Under the new regime, all taxpayers would be treated at par and benefit of deduction/allowances would not be criteria for availing the tax exemption. This may be helpful for those categories of taxpayers who may not subscribe to the specified modes of investments, as most of the investments have a lock-in period, before which it cannot be withdrawn. They can invest in open-ended mutual funds/instruments/deposits, which provide those good returns as well as flexibility of withdrawal as well. For instance, certain eligible instruments have a longer lock-in period such as fixed deposits with banks and post offices have a lock-in period of five years, equity-linked savings schemes (ELSS) is for a period of three years, National Savings Certificates (NSC) for five years, etc. - Increased liquidity in the hands of the taxpayer
The reduced tax rate would provide more disposable income to the taxpayer, who could not invest in specified instruments due to certain financial or other personal reasons. - Flexibility of customizing the investment choice
The existing tax regime provides for deductions to the taxpayer, provided he makes investments in certain instruments and manner as prescribed in the Act. This restricts the investment choices for the taxpayer as he has to make the investments only in the instruments specified. However, the new regime provides taxpayer with a flexibility of customizing their investment choices.
THE CONS OF THE NEW REGIME
- Non-availability of certain specified deductions
The new tax regime does not allow the taxpayer to avail certain specified deductions such as LTA, HRA, Standard deductions, chapter VI A deductions etc. as detailed above - Does not encourage Investments
The new regime does not encourage investments in specified tax-saving instruments and led to no proper savings for any future eventuality like marriage, education, purchase of house property, medical, etc. Also individuals who are habitual of investing may not be able to avail the deductions and might end up paying more taxes irrespective of lower tax bracket when compared to taxation under old regime.
STEPS TO FOLLOW
Step 1: Understand what suits best
If your taxable income is below 5 lakhs or above 15 lakhs, then tax rates are same in both; hence the older regime that allows exemptions is more suited
Step 2: Check the exemptions
Out of all the exemptions that have been removed, check how many are applicable and how much money one can save by opting for those. This will help in the next step.
Step 3: Do the Math
Based on your net taxable income post exemptions/deductions, calculate total income tax under old as well as new regime.
Step 4: Go beyond the numbers
Apart from taxable income, lifestyle, life stage, short- and long-term priorities along with financial goals are excellent parameters to decide what type of tax regime one should opt for. With inflation, rising consumerism and growing needs, it’s important to start saving early and spend smart. The power of compounding has a great role to play in achieving your financial goals.
Step 5: Plan well
It’s important to note that it is possible to change tax regimes every financial year, as both will exist simultaneously. First – time taxpayers may decide to choose the new tax regime as it’s simple to follow and translates to lower tax liability. However, in the long run, investments have financial benefits and taxpayers will want to go for the old regime as that will be more beneficial.
CONCLUSION
The current budget announcement has gone the extra mile to provide ample freedom of choice to each individual. It’s best to understand every variable going along this checklist before making the switch. The new tax structure will suit those who don’t claim too many deductions or want to avoid the paperwork of tax planning. This could include non-salaried taxpayers (including consultants) who are not eligible for the host of exemptions and deductions under Chapter VI-A. It could also include senior citizens who do not draw a pension from their employer and are therefore not eligible for the standard deduction of Rs 50,000 but in the long-run with the availability of deductions & investment options old regime will benefit the taxpayers.
