New Income Tax Regime or Old Regime: What should a Salaried Taxpayer choose?

The Union budget presented in the Parliament in February 2020, the Finance Minister proposed a New Tax Regime as an alternative to the existing Old Tax Regime for Individual and HUFs. Since the New Tax Regime is optional by all means, a taxpayer now has a choice to make between the New and Old Tax Regime after a careful comparison supported by facts and figures.

Income Tax rates under the new tax regime and the old tax regime:

Annual Income New Tax Regime Old Tax Regime
Up to 2.5 Lakh NIL NIL
2.5 Lakh  to 5 Lakh 5% 5%
5 Lakh to 7.5 Lakh 10% 20%
7.5 Lakh to 10 Lakh 15% 20%
10 Lakh to12.5 Lakh 20% 30%
12.5 Lakh to 15 Lakh 25% 30%
Above 15 Lakh 30% 30%

New Income Tax Regime or Old RegimeIn above table it is clearly showing that the new tax regime has proposed lower income-tax rates, for income segments up to Rs 15 lakh, but you need to remember that the proposed lower tax rates will be applicable only if you are willing to give up exemptions and deductions available under various provisions of the Income-tax Act, 1961. This means that when you choose the New Tax Regime, you will have to forgo some exemptions and deductions available under chapter VI A of the Act that grant deductions under Section 80. Even the Standard Deduction under Section 16 (which is currently Rs 50,000) available to salaried individuals and the deduction on home loan interest, under Section 24(b) will be disallowed. Around 70 exemptions and deductions have been removed in the New Tax Regime.

Some of the 70 exemptions and deductions you won’t get in new regime:

  • Leave travel allowance Section 10(5)
  • House rent allowance Section 10(13A)
  • Children Education Allowance
  • Standard deduction
  • Housing loan interest
  • Section 80C investments
  • Medical insurance premium U/S 80D
  • Expenses actually paid for medical treatment of specified diseases and ailments U/S 80DDB
  • Education loan interest U/S 80E
  • Rent paid for furnished/unfurnished residential accommodation U/S 80GG
  • Deduction in respect of donations to certain funds, charitable institutions U/S 80G
  • Interest on deposits in saving account U/S 80TTA
  • Interest on deposits U/S 80TTB for senior citizens
  • Deduction for a certified person with a disability by the medical authority U/S 80U

Will taxpayer gain by switching to new regime?

The Ministry of Finance expects four out of five Income taxpayers to move to the new tax regime. It has analysed the income and investment data of 57.8 million taxpayers and found that 69% would prefer to save on tax under the new system. Another 20% might want to switch to avoid the hassles and paperwork involved in tax planning.

Taxpayer who avail several exemptions and deductions such as house rent allowance and Section 80C deductions may not benefit from switching to the new system. Taxpayer will be able to make the choice depending on their financial situation and depending on what is best suitable from a tax planning point of view. The budget has tried to put more money in the hands of taxpayers by curtailing the incentives to save. Section 80C forces individuals to save, and they will be weaned off savings if there is no tax incentive. The impetus seems to be towards spending, rather than focusing on longer term financial security for taxpayer. Taxpayer who opt for the new tax regime and forgo tax exemptions may end up spending money rather than use it towards their financial safety and security.

You don’t really need to do an elaborate calculation to know that which regime to choose. The answer is actually quite simple. Anyone claiming tax exemptions and deductions of more than Rs 2.5 lakh in a year will not gain from the new structure. This threshold of Rs 2.5 lakh includes the standard deduction of Rs 50,000 for which no investment is required. All salaried taxpayers are eligible for this, which leaves only an additional deduction of Rs 2 lakh. Of this, Rs 1.5 lakh is taken care of by Section 80C investments. The average taxpayer also claims exemption for HRA or claims deduction for the interest paid on a home loan. Then there are other deductions such as the contribution to the NPS, the interest on education loans, treatment of illness and for disabilities. There is also the small but widely claimed exemption of up to Rs 10,000 for savings bank interest under Section 80TTA. The following table based on my computation will give more clarity on how much exemption and deduction required to a salaried income taxpayer to choose old regime:

Annual Income Exemption and Deduction Required
Upto 6 Lakh Only Standard Deduction of Rs.50000/-, All salaried taxpayers are eligible for this
Upto 6.2 Lakh Standard Deduction and exemption and Deduction of Rs.10000/-
Upto 6.4 Lakh Standard Deduction and exemption and Deduction of Rs.20000/-
Upto 6.6 Lakh Standard Deduction and exemption and Deduction of Rs.30000/-
Upto 6.8 Lakh Standard Deduction and exemption and Deduction of Rs.40000/-
Upto 7 Lakh Standard Deduction and exemption and Deduction of Rs.50000/-
Upto 7.2 Lakh Standard Deduction and exemption and Deduction of Rs.60000/-
Upto 7.4 Lakh Standard Deduction and exemption and Deduction of Rs.70000/-
Upto 7.7Lakh Standard Deduction and exemption and Deduction of Rs.80000/-
Upto 8.1 Lakh Standard Deduction and exemption and Deduction of Rs.90000/-
Upto 8.5 Lakh Standard Deduction and exemption and Deduction of Rs.100000/-
Upto 8.9 Lakh Standard Deduction and exemption and Deduction of Rs.110000/-
Upto 9.3 Lakh Standard Deduction and exemption and Deduction of Rs.120000/-
Upto 9.7 Lakh Standard Deduction and exemption and Deduction of Rs.130000/-
Upto 11.95 Lakh Standard Deduction and exemption and Deduction of Rs.140000/-
Upto 12.1 Lakh Standard Deduction and exemption and Deduction of Rs.145000/-
Upto 12.25 Lakh Standard Deduction and exemption and Deduction of Rs.150000/-
Upto 12.6 Lakh Standard Deduction and exemption and Deduction of Rs.160000/-
Upto 13.2 Lakh Standard Deduction and exemption and Deduction of Rs.170000/-
Upto 13.8 Lakh Standard Deduction and exemption and Deduction of Rs.180000/-
Upto 14.4 Lakh Standard Deduction and exemption and Deduction of Rs.190000/-
Upto 15 Lakh Standard Deduction and exemption and Deduction of Rs.200000/-

We would be glad to know your doubts or queries or clarification or suggestion. Please feel free to contact us at: abhishek@arssolutions.co.in +919022838615.

The Author is a Certified and authorized Tax Return Preparer of Income Tax Department of India; currently he is Managing Director and Founder of ARS Solutions.

Disclaimer – Before making any decisions do consult the experts. Author does not take any responsibility for misrepresentation or interpretation of act or rules. Neither the author nor the firm accepts any liability for the loss or damage of any kind arising out of information in this document or for any action taken in reliance there on.

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