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.

Important Points in Deciding the Income 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.

Deductions not available in new scheme of Taxation i.e. If opting for New Income Tax SLab

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 –

1. Leave Travel Allowance

2. House Rent Allowance

3. Conveyance

4. Daily expenses in the course of employment

5. Relocation allowance

6. Helper allowance

7. Children education allowance

8. Other special allowances [Section 10(14)]

9. Standard deduction

10. Professional tax

11. Interest on housing loan (Section 24)

12. Chapter VI-A deduction (80C,80D, 80E, etc.)

Exemptions and Deductions available in new tax regime-

1. Standard deduction on rent under section 24 – 30% of the rent received

2. Agricultural income: No limit

3. Income from life insurance: If insurance cover is 10 times the annualised premium

4. Retrenchment compensation: Rs 5 lakh

5. VRS proceeds: Rs 5 lakh

6. Leave encashment on retirement: Rs 3 lakh (No limit for govt workers)

7. Amount received on the maturity of PPF (Public Provident Fund), Sukanya Samriddhi Yojana

8. Interest received from post office savings account balance up to Rs 3,500 p.a. per individual

9. Gratuity received from the employer up to Rs 20 lakh after rendering 5 years of continuous service.

10. 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.

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