The Finance Minister Nirmala Sitharaman in Union Budget, 2020 introduced new Income Tax regime. In New Income Tax regime, there is an option for individuals and HUF (Hindu Undivided Family) to pay taxes at lower rates. They have to select the Tax regime for the year in the beginning of the Financial Year (FY).
Now, many are confused which option to chose for. However, the answer to such question is quite complex and it need to be assessed on the basis of your Income and Deductions that you are claiming so as to decide which option would be beneficial. This article will help you to reach to a decision.
Difference in slab rates between new and old tax regime for Individuals less than 60 years and HUFs
| Income Tax Slab | Old rate | New Rate |
| Upto Rs. 2.5 Lakh | Nil | Nil |
| Rs. 2.5 lakh to Rs. 5 lakh | 5% | 5% |
| Rs. 5 lakh to Rs. 7.5 lakh | 20% | 10% |
| Rs. 7.5 lakh to Rs. 10 lakh | 20% | 15% |
| Rs. 10 lakh to Rs. 12.5 lakh | 30% | 20% |
| Rs. 12.5 lakh to Rs. 15 lakh | 30% | 25% |
| Rs 15 lakh and above | 30% | 30% |
In both the schemes, Income Tax calculated will be subject to cess @ 4% and surcharge as follows-
| Net Income | Surcharge Rate |
| Exceeds Rs. 50 Lakh but upto Rs. 1 Crore | 10% |
| Exceeds Rs. 1 Crore but upto Rs. 2 Crore | 15% |
| Exceeds Rs. 2 Crore but upto Rs. 5 Crore | 25% |
| Exceeds Rs. 5 Crore | 37% |
Lets analyse the differences between two schemes with the examples. The examples below will give a clear picture whether to opt for New or Old rate on the basis of deductions availed by you.
Example 1 : When a person have done lot of tax saving investments available for deductions.
| Particulars | Old | New |
| Gross Salary | 7,50,000 | 7,50,000 |
| -Standard Deduction | (50,000) | – |
| Income from Salary | 7,00,000 | 7,50,000 |
| Less: Deduction from Salary | ||
| Interest on House loan | (2,00,000) | – |
| Professional Tax | (2,400) | – |
| Gross Total Income | 4,97,600 | 7,50,000 |
| Less: Deductions | ||
| 80C | (1,50,000) | – |
| 80D | (50,000) | – |
| 80JJA | (50,000) | (50,000) |
| Taxable Income | 2,47,600 | 7,00,000 |
| Income Tax on | ||
| Upto Rs. 2,50,000 | Exempt | Exempt |
| Rs. 2,50,000 to Rs. 5,00,000 | – | 12,500 |
| Rs. 5,00,000 to Rs. 7,50,000 | – | 20,000 |
| Rs. 7,50,000 to Rs. 10,00,000 | – | – |
| Total Tax (Before Cess) | – | 32,500 |
In above example, if an assessee has invested amount in investments or scheme which are deductible under chapter VI-A deductions or any other deductions, then he should opt for Old scheme so as to claim deductions and lower the tax amount.
Example 2 : When a person have done less tax saving investments available for deductions.
| Particulars | Old | New |
| Gross Salary | 7,50,000 | 7,50,000 |
| -Standard Deduction | (50,000) | – |
| Income from Salary | 7,00,000 | 7,50,000 |
| Less: Deduction from Salary | ||
| Interest on House loan | – | – |
| Professional Tax | (2,400) | – |
| Gross Total Income | 6,97,600 | 7,50,000 |
| Less: Deductions | ||
| 80C | (1,50,000) | – |
| 80D | – | – |
| 80JJA | – | – |
| Taxable Income | 5,47,600 | 7,50,000 |
| Income Tax on | ||
| Upto Rs. 2,50,000 | Exempt | Exempt |
| Rs. 2,50,000 to Rs. 5,00,000 | 12,500 | 12,500 |
| Rs. 5,00,000 to Rs. 7,50,000 | 9,520 | 25,000 |
| Rs. 7,50,000 to Rs. 10,00,000 | – | – |
| Total Tax (Before Cess) | 22,020 | 37,500 |
As shown in above example, by claiming deduction of Rs. 1,50,000, Income Tax amounts Rs. 22,020 lower than the New Tax Regime.
Example 3 : When a person have done no tax saving investments available for deductions.
| Particulars | Old | New |
| Gross Salary | 7,50,000 | 7,50,000 |
| -Standard Deduction | (50,000) | – |
| Income from Salary | 7,00,000 | 7,50,000 |
| Less: Deduction from Salary | ||
| Interest on House loan | – | – |
| Tax on Employment | (2,400) | – |
| Gross Total Income | 6,97,600 | 7,50,000 |
| Less: Deductions | ||
| 80C | – | – |
| 80D | – | – |
| 80JJA | – | – |
| Taxable Income | 6,97,600 | 7,50,000 |
| Income Tax on | ||
| Upto Rs. 2,50,000 | Exempt | Exempt |
| Rs. 2,50,000 to Rs. 5,00,000 | 12,500 | 12,500 |
| Rs. 5,00,000 to Rs. 7,50,000 | 39,520 | 25,000 |
| Rs. 7,50,000 to Rs. 10,00,000 | – | – |
| Total Tax (Before Cess) | 52,020 | 37,500 |
Thus, if you are not claiming any of the deductions then it would be beneficial to opt for New tax rate regime. As it would reduce your tax by Rs. 14,520 (Rs. 52,020-Rs. 37,500) as calculated above due to lower tax rates in new tax rate regime.
Important Points in Deciding the tax slab rate
1. In light of the above examples and considering the new personal tax regime wherein certain deductions and exemptions would not be available, the taxpayers may evaluate both the regimes.
2. 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.
3. It is notable that the choice can be changed every year and any regime which is beneficial can be adopted by the individual.
4. 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.
5. In New Income tax regime, slab rate for non- senior citizens Individual, Senior citizen as well as Very Senior citizens are same.
6. It is important to note that 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.incometaxindia efiling.gov.in/Tax_Calculator/
Deductions not available in new scheme.
In new tax rate scheme, approx. 70 deductions have been disallowed out of more than 100 deductions available in old Scheme. Some of the Deductions removed in New tax rate regime are –
- Leave Travel Allowance
- House Rent Allowance
- Conveyance
- Daily expenses in the course of employment
- Relocation allowance
- Helper allowance
- Children education allowance
- Other special allowances [Section 10(14)]
- Standard deduction
- Professional tax
- Interest on housing loan (Section 24)
- Chapter VI-A deduction (80C,80D, 80E, etc.)
Exemptions and Deductions available in new tax regime-
- Standard deduction on rent under section 24 – 30% of the rent received
- Agricultural income: No limit
- Income from life insurance: If insurance cover is 10 times the annualised premium
- Retrenchment compensation: Rs 5 lakh
- VRS proceeds: Rs 5 lakh
- Leave encashment on retirement: Rs 3 lakh (No limit for govt workers)
- Amount received on the maturity of PPF (Public Provident Fund), Sukanya Samriddhi Yojana
- Interest received from post office savings account balance up to Rs 3,500 p.a. per individual
- Gratuity received from the employer up to Rs 20 lakh after rendering 5 years of continuous service.
- Withdrawal from National Pension Scheme (NPS) up to 40% of the amount received on such withdrawal. Upto 25% in case of partial withdrawal from NPS.
For any questions, you may reach us at Discussion Forum
The author of above article is CA Rahul Gaur.
Disclaimer:The article or blog or post (by whatever name) in this website is based on the writer’s personal views and interpretation of Act. The writer does not accept any liabilities for any loss or damage of any kind arising out of information and for any actions taken in reliance thereon.
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