Old vs new income tax regime: Benefits & Rates
Old VS New Income Tax regime - Which one will you opt?
- New tax slab and rates
- Is it beneficial or not?
- What goes out and What stays
- Old tax regime
- Deduction and exemptions under old regime
- Advantages of old tax regime
- Limitations of choosing the old regime
- New tax regime
- Advantages of choosing the new regime
- Limitations of choosing the new regime
- Old vs New tax regime
- An example of how to calculate income taxes (old vs new tax regime)
- Bottom line
Introduction
The Finance Budget 2020 introduced a new regime under section 115BAC giving individuals and HUF taxpayers an option to pay income tax at lower rates. The new system is applicable for income earned from 1 April 2020 (FY 2020-21).
Taxpayers had a choice between the old regime with various deductions and exemptions and the new tax regime that offered lower tax rates for those who were willing to forgo exemptions and deductions.
The intention behind this move was to provide significant relief to the individual taxpayers and to simplify the income-tax law.
New tax slab and rates
Old tax rate | ANNUAL INCOME | New tax rate |
Nil | Up to Rs.2.5 lakh | Nil |
5% | Rs.2.5 lakh to Rs.5 lakh | 5% |
20% | Rs.5 lakh to Rs.7.5 lakh | 10% |
Rs.7.5 lakh to Rs.10 lakh | 15% | |
30% | Rs.10 lakh to Rs.12.5 lakh | 20% |
Rs.12.5 lakh to Rs.15 lakh | 25% | |
Above Rs.15 lakh | 30% |
Is it beneficial or not?
The tax has always been confusing for an average Indian. With 3 more tax slabs, it has made it more confusing.
Choosing an old or new tax regime is completely on the taxpayers decision and it will depend on the income structure, available deductions, and circumstances.
If they want to choose the new tax regime, then they will have to forget all the tax deductions and exemptions the old tax regime is providing.
What goes out and What stays
What goes out
The exemptions and deductions you will not be eligible in the new tax regime are:
- Standard deduction – Rs 50,000.
- House rent allowance – depends on salary structure and rent paid.
- Housing loan interest – Rs 3.5 lakh for affordable housing, Rs 2 lakh for others.
- Investments under Sec 80C – Rs 1.5 lakh.
- Leave travel allowance – Tax-free if claimed once in a block of two years.
- NPS contribution – Rs 50,000.
- Medical insurance premium – Rs 25,000 (Rs 50,000 for parents and senior citizens).
- Savings bank interest – Rs 10,000 under Sec 80TTA
- Interest income (for senior citizens) – Rs 50,000 under Sec 80TTBEducation loan interest – Interest paid for eight consecutive years.
- Disability of self or dependent – Rs 75,000 to Rs 1.25 lakh depending on the disability.
- Treatment of self or dependent for specified disease – Rs 40,000.
What stays
The list of exemptions the same as in the old tax regime are:
- Standard deduction on rent – 30% of the rent received
- Agricultural income -No limit
- Income from life insurance – If insurance cover is 10 times the annualized premium
- Retrenchment compensation – Rs 5 lakh
- VRS proceeds – Rs 5 lakh
- Leave encashment on retirement – Rs 3 lakh (No limit for govt. workers)
OLD tax regime
Using the old tax system, an assessee can claim deductions and exemptions to ensure proper tax planning and save money.
The tax system is complicated. But, despite the high tax rates, there are a number of ways to reduce the tax liability. The taxpayers have been provided with approximately 70 exemptions and deductions through the addition of sections to the Income Tax Act over the years, enabling them to reduce their taxable income.
Deductions and exemptions under old regime
Deductions | Exemptions |
Public Provident Fund | House Rent Allowance |
Equity Linked Savings Scheme (ELSS) | Leave Travel Allowance |
Employee Provident Fund | Mobile and Internet Reimbursement |
Life Insurance Premium | Food Coupons or Vouchers |
Principal and Interest component of Home Loan | Company Leased Car |
Children Tuition Fees | Standard deduction |
Health Insurance Premiums | Uniform Allowance |
Investment in NPS | Leave Encashment |
Tuition fee for Children | |
Saving Account Interest |
A combination of exemptions and deductions could reduce your taxable income by lakhs. To minimise your taxable income, tax planning is imperative to maximise your income, savings, and investments each year.
Advantages of opting for the old Tax regime
Old income tax regimes created a savings culture by requiring investments in tax-saving instruments over time. It helps saving for upcoming occasions like marriage, education, property purchases, medical expenses, etc.
Limitations of Selecting the Old Tax Regime
Despite having many benefits, the old tax system had some drawbacks too. The following are some drawbacks of the previous tax system:
- Liquidity is affected by the investment lock-in period.
- Current level of consumption as a result of the investments that have been committed.
- There are only a few investments that can reduce taxes.
- It is difficult to maintain records of claimed deductions.
- Not favourable for taxpayers with zero or fewer tax-deductible transactions.
New Tax Regime
Let’s begin with the new tax regime. Each of its six tax slabs has a lower rate on income up to Rs. 15 lakhs.The various income slabs and tax rates restrict the availability of multiple exemptions and deductions.The new tax regime has its own advantages and disadvantages.
The new tax regime is different from the old one in two ways:
- Under the new system, the number of tax slabs has increased and rates up to Rs. 15 lakh have been cut.
- In the new regime, the taxpayers’ previous exemptions and deductions won’t be available anymore.
Advantages of Opting for the New Tax Regime
The following are some advantages of the new tax system:-
- Taxpayers have the choice of the old or new tax regime that best suits their needs under the present tax regime.
- The new tax law permits investors to invest their money without any restrictions.In this new program, there are no mandatory rules and regulations governing the investment pattern.
- As a taxpayer, you will fall into the tax slab based on your annual income according to the variety of tax slabs available to you.
Limitations of Selecting the New Tax Regime
The following are some issues of the new tax system:
- Compared to the previous tax system, your taxable income will be higher if you have no exemptions.
Old vs New Tax Regime – Which is Better?
Both the old and new income tax slabs have advantages and disadvantages.It all depends on whether you want to use the new tax slab, which has a range of income levels and rates, to make deductions and exemptions.Under the previous taxation system, exemptions and deductions are available.
You should do a comparison of both tax systems’ review and assessment before submitting your taxes. By doing so, you can prepare your taxes in advance and make the appropriate investments.
An example of how to calculate income taxes (Old vs New Tax Regime)
Particulars | Old Tax regime (RS) | New Tax regime (RS) |
Annual Income | 40,00,000 | 40,00,000 |
Less: Standard Deduction | 50,000 | NIL |
Less: Section 80C (EPF +LIC+ Tuition Fees, etc) | 150,000 | NIL |
Less: House Rent Allowance | 50,000 | NIL |
Less: Health Insurance- self and spouse- parents (if senior citizen) | 25,000+50,000 | NIL |
Less: Leave Travel Allowance | 25,000 | NIL |
Less: New Pension Scheme 80CCD (1B) | 30,000 | NIL |
Total (Deduction & Exemption) | 3,80,000 | NIL |
Net Taxable Income (Annual Income – Total deductions & exemptions) | 36,20,000 | 40,00,000 |
Income Tax Slabs (Rs.) | Old Tax Rates | New Tax Rates | Tax(Old) (Rs.) | Tax(New)(Rs.) |
0 – 2,50,000 | 0% | 0% | NIL | NIL |
2,50,000 – 5,00,000 | 5% | 5% | 12,500 | 12,500 |
5,00,000 – 7,50,000 | 20% | 10% | 1,00,000 | 25,000 |
7,50,000 – 10,00,000 | 15% | 37,500 | ||
10,00,000 – 12,50,000 | 30% | 20% | 1,50,000 | 50,000 |
12,50,000 – 15,00,000 | 25% | 62,500 | ||
15,00,000 & above | 30% | 30% | 6,36,000 | 7,50,000 |
Total taxes | 8,98,500 | 10,12,500 | ||
Add: Higher Education Cess @4% | 35,940 | 40,500 | ||
Total tax payable | 9,34,440 | 10,53,000 |
So, as you can see, the previous tax system was better. Taxes will be reduced by Rs 118,560 if the previous tax system is used rather than the new one.
Bottom line
As per the above example, if the annual income is higher, the old tax system is preferable than the new one. There are benefits and disadvantages to both the old and new income tax slabs.
The new tax regime is designed for the individuals and new investors who recently started their careers, as their income has just begun.
Because of this, the only way to determine whether the old or new tax regime is to enter your income into both regimes to calculate your tax liability.
This post on the difference between the Old vs New Income tax regime has come to an end. Share your views and opinions with us in the comment section below.
