New Tax Regime vs Old Tax Regime

New Tax Regime vs Old Tax Regime

Topics covered in the Blog:

Features of New Tax Regime:

  • New Income Tax regime under Section 115BAC was introduced in Finance Act, 2020 with the purpose of reducing tax burden on Individuals and HUF.
  • The new tax regime is applicable with effect from FY 2020-21, i.e., AY 2021-22.
  • It includes more tax slabs and less tax rates. It is also known as concessional tax regime.
  • Certain deductions and exemptions allowed under old tax regime are not allowed under the new tax regime. If a person opts New Tax Regime, then he will have to forgo many deductions and exemptions.
  • The new regime is optional which means, even though new tax regime has been introduced, tax payers have an option to continue with existing tax regime and avail all the deductions and exemptions.

Tax rates

Total Income ( in Rs.)Tax rates under New Tax RegimeTax rates under Old Tax Regime
Upto 2,50,000NilNil
From 2,50,000 to 5,00,0005%5%
From 5,00,001 to 7,50,00010%20%
From 7,50,001 to 10,00,00015%
From 10,00,001 to 12,50,00020%

 

30%

From 12,50,001 to 15,00,00025%
Above 15,00,00030%

In old tax regime, tax is exempt upto Rs. 3,00,000 for individuals from 61 to 80 years of age and for individuals above 80 years of age, exemption is upto Rs. 5,00,000.

But under the New Tax Regime, tax exemption is upto Rs. 2,50,000 for all age groups.

List of deductions/exemptions NOT allowed under the New Tax Regime

SectionNature of deductions
80-CMaximum deduction of Rs. 1,50,000 on ELSS, Life insurance, tuition fees, PPF, FD for 5 years, repayment of house loan,
80-DMaximum deduction of Rs. 1,00,000 on Mediclaim insurance premium
80-DDMaximum deduction of Rs. 1,25,000 for dependent who is differently-abled
80-DDBDeduction for expense on specified medical treatments
80-GDonation to various relief funds and charitable institutions
80-EInterest on education loan
80 TTA/TTBInterest on bank accounts, deposits in cooperative societies, post office deposits  
24(b)Interest on home loan
16 (ia)Standard deduction of Rs. 50,000/-
16 (iii)Professional Tax of Rs. 2,500/-
10(13A)House Rent Allowance Exemption
10(5)Leave Travel Allowance

 

However, certain deductions and exemptions are ALLOWED under the new tax regime which are:

A. Deduction for employer’s contribution in Notified Pension Scheme under section u/s 80CCD(2) and deduction for new employment u/s 80JJAA.

B.  Special Allowances for salaried employees such as:

  • Transport allowance granted to a disabled employee
  • Conveyance allowance
  • Any allowance granted to meet the cost of travel on tour or on transfer
  • Daily allowance

C.  Interest received on post office savings account u/s 10(15)(i), maximum Rs. 3,500.

Business expenditure not allowed under the new regime

Deductions and exemptions NOT allowed for business income:

a)   Additional depreciation under section 32.

b)   Investment allowance under section 32AD.

c)   Sector-specific business deductions under section 33AB and 33ABA.

d)   Expenditure on scientific research under section 35 and capital expenditure under section 35AD.

e)    Exemption under section 10AA for SEZ units.

Can I choose between new and old tax regime?

  • As we know by now, new tax regime is only applicable for IndividualsHUF. Any other person cannot avail the new tax regime.
  • New tax regime is an optional regime, which means that an individual taxpayer can choose between new or old tax regime. Individuals can choose between the regimes every year.
  • However, individuals earning income from business or profession who have opted for the new regime in any year and then goes back to the old tax regime in any subsequent year, cannot opt for the new regime again and has to follow the old tax regime only.
  • Employees should declare the opted tax regime to their employers in the beginning of the year.
  • Although, the option of selection of the tax regime has to be exercised at the time of filing of ITR, but, for the purpose of deduction of taxes or payment of advance tax, this decision should be taken in the beginning of the Financial Year.

Benefits & Drawbacks of New Tax Regime

Benefits Drawbacks
Low tax rates as compared to old tax regime. More tax liability due to disallowance of deductions/exemptions.
Beneficial for people with no to low investments. Not suitable for people having high investments.
Optional scheme, individuals can opt old scheme in the next FY if this regime is not suitable. Reduced flexibility in opting the new regime for individuals having income for business of profession

Old Tax Regime vs New Tax Regime – which is better?

This could only be understood through the help of examples:

Example 1:

Particulars Old Tax Regime (Rs) New Tax Regime (Rs)
Gross Income   11,00,000    11,00,000 
Deductions:    
U/Sec: 80C   1,00,000   
U/Sec: 80D   50,000   
Taxable Income   9,50,000   11,00,000
Tax liability: Rate Rate
0 to 2.5 Lacs 0 0
2.5 to 5 Lacs 5% 12,500  5% 12,500
5 Lakh to 7.5 Lacs 20% 50,000  10% 25,000
7.5 Lakh to 10 Lacs 20% 40,000 15% 37,500
10 Lacs to 12.5 Lacs 30% 20% 20,000
Income Tax   102,500    95,000 

It can be seen that even through the individual had investments u/s 80C and 80D, tax liability as per the old regime is higher as compared to the new regime. This is due to the fact that the impact of reduced tax rates on the total tax liability under the new tax regime was more as compared to the impact of deductions due to investments under the old tax regime.

Example 2:

ParticularsOld Tax Regime (Rs)New Tax Regime (Rs)
Gross Income 11,00,000  11,00,000 
Deductions:    
U/Sec: 80C 1,00,000  
U/Sec: 80D 50,000  
U/Sec: 80E 1,00,000 
U/Sec: 24b 80,000 
Taxable Income 7,70,000 11,00,000
Tax liability:Rate Rate 
0 to 2.5 Lacs00
2.5 to 5 Lacs5%12,500 5%12,500
5 Lakh to 7.5 Lacs20%50,000 10%25,000
7.5 Lakh to 10 Lacs20%4,00015%37,500
10 Lacs to 12.5 Lacs30%20%20,000
Income Tax 66,500  95,000 

It can be seen that due to higher investments, tax liability under old regime is very less as compared to the new regime.

Generally, if a person does not have considerable investments during the year, he/she can opt for new regime to save more taxes.

Although, in order to decide which regime is the most suitable regime, a taxpayer should carefully analyze & calculate their income tax liability taking into account all the factors associated with each regime.

For detailed analysis, watch video on : 

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