From Financial year 2020-21, taxpayers (Individuals and HUFs) has an option to choose between Old Tax regime and the new Tax Regime.  The new tax regime is available with lower tax rates and almost zero deductions/exemptions.

Here is the quick comparison table between tax rates at different slabs under Old Tax Regime vs. New Tax Regime

Tax Slab Old Tax Rate New Tax Rate
0 – 2,50,000 0% 0%
2,50,000 – 5,00,000 5% 5%
5,00,000 – 7,50,000 20% 10%
7,50,000 – 10,00,000 20% 15%
10,00,000 – 12,50,000 30% 20%
12,50,000 – 15,00,000 30% 25%
15,00,000 & above 30% 30%

As you can see under the new regime, income between Rs. 5 lakh and Rs. 7.5 lakh would be taxed at 10 percent, while income between Rs. 7.5 lakh to Rs. 10 lakh would be taxed at 15 percent. There is 20 percent flat on the entire slab for the existing regime. The earlier Rs. 10 lakh+ slab where you paid 30 percent, has been broken into three parts with rates of 20 percent for Rs. 10-12.5 lakh, 25 percent for Rs. 12.5 lakh-15 lakh and then 30 percent for Rs. 15 lakh and above.

List of Exemptions and Deduction available in Old and New Tax Regime

As we discussed, most of the exemption and deduction are not available under new tax regime. Here is the list of exemptions and deductions allowed or disallowed under both regimes-

Claiming of Exemption or Deduction Allowed or Not Old Tax Regime New Tax Regime
Leave travel allowance u/s 10(5) Allowed  Not allowed
House rent allowance u/s 10(13A) Allowed  Not allowed
Allowances to MPs/MLAs u/s10(17) Allowed  Not allowed
Allowance for clubbing of income of minor – Rs 1500 per child Allowed  Not allowed
Deduction for SEZ unit u/s 10AA Allowed  Not allowed
Standard deduction for salaried employees – Rs 50,000 and deduction for entertainment allowance and professional tax as contained in section 16 Allowed  Not allowed
Interest u/s 24 in respect of self occupied or vacant property u/s 23(2) Allowed  Not allowed
Allowance exempt u/s 10(14) except transport allowance to a divyang employee, conveyance allowance, daily allowance, cost to travel on tour Allowed  Not allowed
Additional depreciation u/s 32(1)(iia) Allowed  Not allowed
Deductions u/s 32AD, 33AB and 33ABA Allowed  Not allowed
Deduction for donation or expenditure on scientific research u/s 32(1)(ii)/(iia)/(iii) or 35(2AA) Allowed  Not allowed
Deduction from family pension under clause (iia) of section 57 Allowed  Not allowed
Deduction u/s 35AD or 35CCC Allowed  Not allowed
Any deduction under chapter VI-A except deduction u/s 80CCD(2) (employer contribution on account of employee in notified pension scheme)or 80JJAA (for new employment) Allowed Not allowed
Standard deduction on rent – 30% of the net annual value u/s 24 Allowed Allowed
Rebate u/s 87A (Max Rs. 12500) Allowed Allowed

Old vs. New Tax Regime: Which one you should opt

There is no single answer to this as it depends on your annual earnings and component of exemptions and deductions included in it. However, prima facie new tax regime may seems beneficial due to reduced tax rates at various slabs.

Let’s discuss few examples to have a better understanding-

Example 1

Income (Rs) Old regime (Rs) New regime (Rs) Tax Difference (Rs)
Salary 1,250,000
Less: Standard deduction 50,000
Gross total income 1,200,000
Less: Deduction u/s 80C 150,000
Total income 1,050,000
Income tax 127,500 125,000
Add: Education cess @ 4% 5,100 5,000
Total tax  132,600 130,000 2,600

In the above example, for an income of Rs 12,50,000, the new tax regime is marginally beneficial. However, if you claim further deductions for health insurance, investment in NPS, education loan and so on, the existing regime will be helpful.

Example 2

Income (Rs) Old regime (Rs) New regime (Rs) Tax Difference (Rs)
Salary 2,000,000
Less: Standard deduction 50,000
Less: HRA 50,000
Less: Health Insurance 25,000
Less: Leave travel Allowance 25,000
Less: NPS 80CCD(1B) 30,000
Less: Deduction u/s 80C 150,000
Total income 16,70,000
Income tax 3,13,000 3,37,500
Add: Education cess @ 4% 12,542 13,500
Total tax  3,26,040 3,51,000 24,960

In the above example, for an income of Rs 20,00,000, the old tax regime is beneficial.

It can be said that if you are claiming more deductions and exemptions then opting Old tax regime works better for you. However, it is advisable to perform calculation of tax under both regime and then opt accordingly.

Things to keep in mind while opting new tax regime

The choice is available every year and any regime which is beneficial can be adopted by the individual & HUF (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 regimes every year. If they opt for the new regime, such taxpayers 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 regime unless their business income ceases to exist.

Note- The information provided in this article is generic in nature and for informational purposes only.

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June 2021