Comparison of new income tax regime with old tax regime

Question:New income tax regime vs old: What is good for you? 

Answer: Old Income Tax Regime is better.

Comparison of new income tax regime with old tax regime: FY 19-20 (AY 20-21)

In the new budget for the fiscal year 2020-21, Finance Minister Nirmala Sitharaman introduced the new income tax rate for tax-payers in India. The Finance minister said in her budget speech that the Current Income Tax Act is full of various exemptions and deductions that make compliance complicated and a burdensome process for the taxpayers.

Though the removal of tax deductions and exemptions would make the compliance less tedious, those who have maintained their financial portfolio to avail tax deductions as per the old slab are likely to pay more tax under the new tax slabs.

The new budget tries to curtail the option to save the incentives and puts more money in the hands of taxpayers. However, the Individuals and Hindu Unified Families (HUF) are given an option to choose between the old and the new tax regime.

So, coming to the old tax rates-  it was nil for the annual income up to Rs. 2.5 lakhs, 5% for annual income between Rs. 2.5 lakhs to Rs. 5 lakhs. 10% for income group between Rs. 5 lakh and Rs. 12.5 lakh and 30% for 12.5 and above.

And in the new tax regime, the income group between Rs. 5 lakhs and Rs. 7.5 lakhs would be required to pay income tax at 10%. And the income group ranging from Rs. 7.5 lakhs to Rs. 10 lakh will be required to pay tax at 15%. And those falling in the income group of Rs. 10-12.5 lakhs and Rs. 12.5-15 lakhs will be levied tax at 20% and 25% respectively. It is seen that with the new tax regime is likely to make taxpayers pay a higher tax amount in the long-term in comparison to the old regime.

And in the old tax regime, the taxpayers benefitted from several tax exemptions and deductions including tax deductions on health insurance and ELSS investments under section 80 C and house rent allowance, which is not possible on switching to the new system. Because the new tax policy does not offer exemptions like the old one.

Simply put, if you are a salaried taxpayer then you will have to forgo the available deductions under the old tax regime under chapter VI-A, such as investments under Section 80C, HRA, health insurance premium, etc.

But there are no changes in the surcharge; it will remain the same as the old one- 10% for Rs. 50 lakhs to Rs. 1 Crore, 15% for Rs. 1 Crore to Rs. 2 Crores, 25% for Rs. 2 Crores to Rs. 5 Crores and 37% for over and above Rs. 5 Crores.

Let’s discuss how the new and old tax slab rates differ for each income group. And what are the exemptions that are taken off the budget.

Tax Slabs and Rates under the New Regime

The exemption is given to people earning up to Rs. 5 lakh remains the same. Below is the table with the old and new tax rate as applicable on the annual income:

Things to consider:

• The above-mentioned new rates are without any deductions under different sections of Chapter VI-A.
• If a tax-payer claims a deduction of Rs. 2.5 lakhs (standard deduction of Rs. 50,000, Rs. 1.5 lakhs u/s 80C and investment in NPS of Rs. 50,000), the tax will remain the same as the old one.
• In case he also claims home loan interest deduction of Rs. 2 lakhs or HRA exemption, the old tax slab rate would be Rs. 46,800 lesser than the new regime.

Here’s how the new and the old tax regime will impact the tax payers at different income levels.

Individual Income Rs. 10 lakhs, living in own house so does not claim HRA and is under 60 years of age group.

Now let’s see how the income group above Rs. 15 lakhs will be charged in the old regime and the new regime. This is a separate calculation from the above table:

Income: Rs. 15 lakhs

Income: Rs. 30 lakhs

The above payable tax would include Cess @ 4% extra. The above calculation is for reference purpose only.

* Deductions Applicable: Rs 1.5 lakhs u/s 80C; Rs. 50,000 standard deduction; Rs. 25,000 u/s 80D; Rs. 2 lakhs home loan interest u/s 24.

Income: Rs. 60 lakhs

* Deductions Applicable: Rs 1.5 lakhs u/s 80C; Rs. 50,000 standard deduction; Rs. 25,000 u/s 80D; Rs. 2 lakhs home loan interest u/s 24.

Exemptions and Deductions 

Here is the difference between the exemptions and deductions between the old tax regime and the new tax regime:

So, you will not gain from the new regime if you the tax exemptions & deductions that you are claiming in a year more than Rs. 2.5 lakhs that applies to income group above Rs.15 lakhs. If your NPS contribution/HRA exemption/ housing loan interest claims are more than Rs. 50,000 then sticking to the old regime would be beneficial for you. Basically, the higher the investments, and exemptions apart from the standard deduction, the better it is to stick to the old tax regime.

However, as per the financial minister, a taxpayer with an annual income of Rs. 15 lakhs can save Rs. 78,000 under the new tax regime.  But if you are the saving kind then do stick to the old tax regime.

Making the choice

In light of the above and considering the new personal tax regime wherein certain deductions and exemptions would not be applicable in case of taxpayers opting for concessional new tax regime, the taxpayers may evaluate both the regimes. 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. However, it is advisable to do a comparision.

It is notable that, the choice can be exercised every year and any regime which is beneficial can be adopted by the individual (except for those who have income from business or profession). 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.

Takeaway

Theoretically, the new tax regime might be offering lower tax rates and lesser complications but taking into consideration the overall tax benefits that one can avail under the available exemptions and deductions, the new tax regime doesn’t seem to promise as one would end up paying a higher tax amount. Well, the choice remains subjective here.