Decoding the tax system in general can be daunting. Now with two tax regime choices offered, the old and the new, the taxpayers could be in a fix to understand which one is better for them. Since there is no one fit approach for all taxpayers, this article explains the two tax regimes with a comparative analysis to help you decide which one works for you.
In order to provide significant relief to taxpayers and to “simplify” income tax law, budget 2020 introduced a new Direct Tax regime, to remove the dependency of citizens on tax consultants and do their taxes on their own. The new tax regime comes with reduced tax slabs for individual and HUF taxpayers with a condition to forego certain tax deductions or exemptions. However, tax payer opting for new tax regime are still eligible to claim deduction u/s 80CCD(2) (employers contribution in notified pension scheme) and 80JJAA (for new employment).
From the financial year 2020-2021, every individual and HUF has the option either to continue with existing tax rate where exemptions and deductions can be claimed or to opt out for new tax regime where the rates are lower but there are no exemptions or deduction. Although this option must be exercised at the time of filling of return but for the purpose of payment of advance tax or TDS on salary this option has to be ascertained at the start of financial year. If you fail to inform your employer at the beginning of the financial year that you want to switch to the new tax regime, then your employer can deduct TDS considering that you are covered under old tax regime.
Old tax regime vs. new tax regime: Which is better?
There cannot be a straight answer to this question as it depends on each taxpayer’s situation and financial position. Looking at the reduction in tax rates new system looks better but due to non-availability of various deductions or exemptions, it is advisable to do comparative evaluation and analysis under both the regimes before you opt for the new regime or decide to continue with the old one.
The Income-tax rates under the old tax regime and the new tax regime are as under:
|Total Income (Rs)||Old Regime||New Regime|
|Up to 2.5 lakh||Nil||Nil|
|2.5 to 5 lakh||5%||5%|
|5 to 7.5 lakh||20%||10%|
|7.5 to 10 lakh||20%||15%|
|10 to 12.5 lakh||30%||20%|
|12.5 to 15 lakh||30%||25%|
|Above 15 lakh||30%||30%|
(Above rates are subject to surcharge and cess, as applicable)
List of benefits forgone under new tax regime
When you look at the above tax slabs, of course, the new tax regime comes out as a winner. The tax charged under the new regime is lower in most categories. For example, for a person earning between ₹5,00,000 – ₹7,50,000, in the new tax regime, the tax percentage has been reduced from 20% to 10%
But here’s the catch.
The new tax regime does not allow the taxpayer to benefit from certain deductions and exemptions. Here’s a look at some of the major deductions or exemptions that shall not be available for someone who has opted for new tax regime:
|Opportunity loss to Salaried Person:|
|– Standard deduction maximum deduction Rs. 50,000/-|
|– Professional Tax paid by maximum Rs. 2,500/-|
|– Leave travel allowances|
|– House rent allowances depending upon salary structure and rent paid|
|– Special Allowances provided u/s 10(14) except:
a) Transport allowance granted to a handicapped employee
b) Conveyance allowance
c) Any allowance granted to meet the cost of travel on tour or on transfer
d) Daily allowance
|Opportunity loss to Business or Profession|
|– Exemption to SEZ u/s. 10AA|
|– Deductions u/s. 32AD, 33AB, 33ABA, 35(1)(ii),35(1)(iia), 35(1)(iii), 35(2AA), 35AD and 35CCC|
|– Additional depreciation u/s. 32(iia)|
|– Carried forward or unabsorbed depreciation of earlier years|
|Opportunity loss to All the Taxpayers|
|– Interest paid on home loan on self-occupied house Maximum deduction Rs. 2,00,000|
|– All deductions provided under Chapter VIA (except 80CCD(2) and 80JJAA)
a) 80-C: LIP, tuition fees, PPF, EPF, tax saving FDR, Repayment of home loan, mutual funds (ELSS), NSC etc. Maximum deduction Rs. 1,50,000
b) 80-D: Mediclaim insurance premium maximum deduction Rs. 25,000 to 1,00,000
c) 80-G: Donation
d) 80-DD: Dependent who is differently-abled maximum deduction Rs. 75,000 to 1,25,000
e) 80-DDB: Expense for specified medical treatments
f) 80-E: Interest on education loan
g) 80-TTA: Interest on saving bank accounts
However, there are certain tax deductions and exemptions which are still available under new tax regime also:
|Benefit still available under new regime:|
|· Interest received on post office saving account u/s 10(15)(i) Maxi Rs. 3,500|
|· Gratuity received from employer Maximum Rs. 20 Lacs
· Amount received from LIP on maturity u/s 10(10D)
|· Employer contribution in NPS or EPF upto 12% of salary & Interest on EPF upto 9.5% P.A.|
|· Interest and maturity amount of PPF or Sukanya Smriddhi Yojna|
|· Commutation of Pension|
Comparative tax position for taxpayers: Old regime v. New regime
To make this comparison more meaningful, let’s take three case scenarios of three people with different situations when it comes to their expenses and investments.
Example-I: Mr. Mehul is a salaried person and earns Rs. 7,50,000 per annum. He lives in a rented house and receives HRA from the company. Company deducts PF of Rs. 10,000 from his salary.
Example-II: Mr. Nirmal is a salaried individual with a salary of Rs. 9,50,000. He owns a house and he paid interest on home loan Rs. 82,500/-. His contribution to PF is Rs. 20,000 and he paid tuition fees for his child’s education of Rs. 70,000. He also repaid home loan of Rs. 10,000.
Example-III: Mr. Amit is a salaried individual with a salary of Rs. 14,00,000. He has a home loan, on which he pays an interest of Rs. 1,22,500. His contribution to PF is Rs. 30,000. He also paid tuition fees of Rs. 90,000 and his repayment towards home loan is Rs. 30,000. He holds a medical insurance policy towards which he paid Rs. 20,000 on account of insurance premium.
|A. Salary Income||7,50,000||7,50,000||9,50,000||9,50,000||14,00,000||14,00,000|
|C. Salary Taxable (A-B)||6,50,000||7,50,000||8,82,500||9,50,000||13,22,500||14,00,000|
|D. Less:- Home loan Interest||-NIL-||-NIL-||82,500||-NIL-||1,22,500||-NIL-|
|E. Less:- Deductions|
|80-C PF Contribution||10,000||-NIL-||20000||-NIL-||30,000||-NIL-|
|80-C School Tuition Fess||-NIL-||-NIL-||70,000||-NIL-||90,000||-NIL-|
|80-C Home Loan Repayment||-NIL-||-NIL-||10,000||-NIL-||30,000||-NIL-|
|80-D Medical Insurance||-NIL-||-NIL-||10,000||-NIL-||20,000||-NIL-|
|Taxable Income (C-(D+E))||6,40,000||7,50,000||6,90,000||9,50,000||10,30,000||14,00,000|
From the above examples it is very clear that a taxpayer having no investments or savings should go for new tax regime because of lower taxation rates. However, if a taxpayer is having home loan and other investments old tax regime would be beneficial for him.
Once you have made the choice, can you again switch from the selected tax regime to the other one later?
The taxpayers having income from salary, house property, capital gain or other sources may select tax regime year on year basis. However, if taxpayer has income from business profession and they opt for new tax regime, they can switch back to old tax regime but only once in lifetime and they will not be able to opt for new tax regime again unless their business income ceases to exist.
Both taxation regimes have their own pros and cons. The old taxation regime inculcates habit of investing in a taxpayer. New taxation regime is better for those taxpayers who have started their career and they have less income and less investments resulting in lesser deductions and exemptions. Therefore, one has to wisely consider his/her exemptions, deductions claimed, his/her investing patterns and the tax planning involved before opting for new or the old tax regime.
Everyone will have their own set of deductions and exemptions so one needs to assess comparatively both the regimes to see what works best for them. Hence, it is recommended to consult professionals before taking any stand.