New Tax Regime or Old Tax Regime

Time to Choose Your Pick: New Tax Regime or Old Tax Regime?

It is again the time of the year when you have to submit your investment details to your employer. This year, you will have to choose between the old tax regime or the new tax structure. Whatever tax structure you adopt, will be effective for the entire financial year.

Here’s how the old and new tax regimes compare against each other:

Tax Slab(in Rs.)The tax rate under the old regimeThe tax rate under the new tax regime
0-Rs.2.5 lakhs0%0%
Rs.2.5 lakhs to Rs.5 lakhs5%5%
Rs.5 lakhs to Rs.7.5 lakhs20%10%
Rs.7.5 lakhs to Rs.10 lakhs20%15%
Rs.10 lakhs to Rs.12.50 lakhs30%20%
Rs.12.50 lakhs to Rs.15 lakhs30%25%
Rs.15 lakhs and above30%30%

Finance Minister Nirmala Sitharamanin her budget speech of 2020 announced a new tax regime with more tax slabs and lower tax rates on income up to Rs.15 lakhs. However, taxpayers can’t avail of tax benefits such as the standard deduction of Rs.50,000, deductions under sections 80C and 80D, concessions on the interest paid on a home loan, or rent under the new tax regime. 

Advantages of the new tax regime:

Reduced tax rates and easy tax filing:

When compared to the old tax system, the tax rate on the new tax regime is lower. Moreover, as exemptions are not available in this system, tax filing will be easier.

More money in hands:

With the reduced tax rate, individuals can have more disposable income in their hands.

Invest in investment options in their choice:

Most of the tax-saving instruments have a lock-in period. Many taxpayers may not be comfortable investing in these investment options due to the lock-in period or other reasons. With the new tax structure, individuals can invest in investment options of their choice.

Drawbacks of the new tax regime:

Under the new tax structure, individuals can’t avail any tax deductions under various sections. Some of the popular tax-saving avenues such as investments available under section 80C and 80D, house rent, interest on the home loan, leave travel concession, etc. can’t be availed. The Ministry of Finance has removed around 70 exemptions out of the 120 exemptions.

Whether to choose the old tax regime or new tax regime

If you are looking for a simple answer to this question, then we hate to share the fact that there is one line answer to that question. You can arrive at the right tax structure after calculating how much tax you are able to saving through both the tax structures.

To figure out the best tax structure, calculate the exemptions that you are availing and the deductions that you claim. Rent on house, travel leave allowance, food bills, and phone bills might be some of the exemptions that you are currently availing. If you are a salaried employee, you automatically get a tax exemption of Rs.50,000 and an EPF contribution. Also, calculate the deductions that you claim against your home loan, education loan, and other investments.

Now, calculate the taxable income by adding the exemptions and deductions and subtracting it from your salary. This can help you to figure out a favorable tax regime.

Let us understand it with the help of two examples. Let us consider two taxpayers with an annual income of Rs.7.5 lakhs and an annual income of up to Rs.10 lakhs respectively. For ease, we take that the individuals have invested the maximum amount under various heads.

The annual income of Rs.7.5 lakhs

Let us first calculate the tax payable without any exemptions and compare the old tax and new structure. 

 Old Tax structure New Tax structure 
Income tax slabTax RateTax(in Rs.)Tax RateTax(in Rs.)
Up to Rs.2.5 lakhs0000
Up to Rs.5 lakhs5%125005%12500
Up to Rs.7.5 lakhs20%5000010%25000
Total 62500 37500
Health and education cess4%25004%1500
Tax payable 65000 39000

We see that the new tax structure is favorable without any tax exemptions.

Now, let us assume that the taxpayer uses different benefits.

Annual Income with Tax Exemptions
Annual Income7,50,000
Exemptions under 80C1,50,000
80CCD(1B)50000
80D50000
HRA10000
Taxable income 490000

In this case, as the taxable income is below Rs.5 lakhs, the person does not have to pay any tax. So, we see that when the individual uses the different tax saving options, the taxpayer does not have to pay any tax.

The annual income of Rs.10 lakhs

 Old Tax structure New Tax structure 
Income tax slabTax RateTax(in Rs.)Tax RateTax(in Rs.)
Up to Rs.2.5 lakhs0000
Up to Rs.5 lakhs5%125005%12500
Up to Rs.7.5 lakhs20%5000010%25000
Up to Rs.10 lakhs20%5000015%37500
Total 112500 75000
Health and education cess4%45004%3000
Tax payable 117000 78000

Here we see that the new tax regime results in lesser taxes.

Let us see the impact on taxable income if we consider deductions.

Taxable Income  with Tax Exemptions
Annual Income10,00,000
Exemptions under 80C1,50,000
80CCD(1B)50000
80D50000
HRA10000
Taxable income 740000

In this case, the taxable income falls below Rs.7.5 lakhs.

Now, let us compare the old tax structure with exemptions and the new tax structure.

 Old Tax structureNew Tax structure
Income tax slabTax RateTax(in Rs.)Tax RateTax(in Rs.)
Up to Rs.2.5 lakhs0000
Up to Rs.5 lakhs5%125005%12500
Up to Rs.7.5 lakhs20%5000010%25000
Up to Rs.10 lakhs 015%37500
Total 62500 75000
Health and education cess4%25004%3000
Tax payable 65000 78000

We see that the taxpayer has to pay less tax if the old tax structure with exemptions has opted.

Conclusion:

While many investment options offer tax benefits, tax planning should be the main focus while taking any investment decisions. Finding out the best tax regime will depend on various factors such as tax slab, deductions, and exemptions availed, and investment options. So, talk to your CA or financial advisor to figure out the best tax regime. 

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