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In the new budget for the financial year 2020-21, Finance Minister Nirmala Sitharaman introduced a new income tax rate for taxpayers in India. The Finance Minister in her budget speech said that the current Income Tax Act is full of various exemptions and deductions which make compliance complicated and a cumbersome process for the taxpayers. The new budget tries to reduce the option of saving incentives and puts more money in the hands of taxpayers. However, individuals and Hindu Integrated Families (HUFs) have been given the option to choose between the old and the new tax regime. The finance minister gave taxpayers a choice between the new regime and existing one, leaving it to them to decide which they would like to opt for. And if you are wondering how to go about figuring out whether you should opt for the new or the old tax regime while filing ITR.

Let us broadly discuss the features of both the regime

Old v/s New : A comparison for both different slabs

Which is Better- Old Tax Regime vs New Tax Regime

Tax Slabs Tax Rates under the Old Tax Regime Tax Rates under the New Tax Regime
up to 2,50,000 Nil Nil
2,50,000 to 5,00,000 5% 5%
5,00,000 to 7,50,000 20% 10%
7,50,000 to 10,00,000 20% 15%
10,00,000 to 12,50,000 30% 20%
12,50,000 to 15,00,000 30% 25%
Above 15,00,000 30% 30%

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.

Which Exemptions and Deductions are allowed and which have been removed?

In the old tax regime , there are 120 exemptions. Taxpayers do not benefits from all of them. The finance ministry of finance has removed around 70 exemptions. Old vs New tax regime is a new change for salaried person and HUF.

Old Tax Regime

  • Standard deduction
  • House rent allowance
  • Section 80C investments
  • Housing loan interest
  • Medical insurance premium
  • Education loan interest
  • Leave travel allowance
  • Savings bank interest
  • Deductions allowed under the old tax regime

New Tax Regime

  • Standard deduction on rent
  • VRS proceeds
  • Agricultural income
  • Retrenchment compensation
  • Income from life insurance
  • Leave encashment on retirement
  • Deductions won’t be entertained under the new tax regime.

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

Case 1

INCOME 10,00,000 10,00,000
Deduction 80C 1,50,000 N/A
Deduction 80D 50,000 N/A
Standard Deduction 25,000 N/A
Taxable income 7,75,000 10,00,000
0-2.5 Lakhs Nil Nil
2.5-5 Lakhs 12,500 12,500
5-7.5 Lakh 50,000 25,000
7.5-10 lakh 5,000 37,500
Total Tax Payable 67,500 75,000

Case 2

OLD TAX RATES (With Deductions) OLD TAX RATES (Without Deductions) NEW TAX RATES
INCOME 15,00,000 15,00,000 15,00,000
Deduction 80C 1,50,000 N/A N/A
Deduction 80D 50,000 N/A N/A
Standard Deduction 25,000 N/A N/A
Taxable income 12,75,000 15,00,000 15,00,000
0-2.5 Lakhs Nil Nil Nil
2.5-5 Lakhs 12,500 12,500 12,500
5-7.5 Lakh 50,000 50,000 25,000
7.5-10 lakh 50,000 50,000 37,500
10 – 12.5 Lakhs 75,000 75,000 50,000
12.5-15 Lakhs 7,500 75,000 62,500
Total Tax Payable 1,95,000 2,62,500 1,87,500

The new tax regime may offer lower tax rates and fewer complications, but considering the overall tax benefits that one can avail under the available exemptions and deductions, the new tax regime does not hold promise as one can pay more. Well, the choice remains subjective here.

Written by- Babita Sharma (CMA) | Team Edu-Visor


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April 2024