As per the demand of large taxpayers the finance minister Smt. Nirmala Sitharaman has brought the concept of new tax regime in the budget 2020. The finance minister gave taxpayers a choice between the new tax regime and existing one.
In the new tax regime tax rates are lower as compared to old tax regime. But there are no exemptions or deduction available or choose to continue with the regular old regime.
In the new regime, the tax slabs have increased, accompanied by lowering of income tax rates.
Following are the major differences in the old tax regime and new tax regime.
NEW V/S. OLD TAX SCHEME UNDER INCOME TAX ACT 1961
|Particular||New Tax Scheme||Old Tax Scheme|
|Tax Slab for individuals below 60 years of age||Taxable Income up to & Tax on it :
||Taxable Income up to & Tax on it :
|Cess||Health and education cess @ 4% will be added on and above tax as computed above.||Health and education cess @ 4% will be added on and above tax as computed above.|
|Deduction under Chapter VI-A of Income Tax Act.||Following deductions will not be allowed i.e. will not be deducted from Income to arrive at final taxable income:
||All deductions under chapter VI-A as listed in “New tax Scheme” will be allowed to be deducted from income to arrive at taxable income.|
|Deduction from salary||Deductions from salary on below items not allowed :
||All deductions from salary as listed in “New tax Scheme” will be allowed to be deducted from salary to arrive at taxable salary in the hand of assesse.|
|Rebate u/s. 87A||If taxable income (i.e income with no deductions and exemptions as above) does not exceeds Rs. 5 lacs, than rebate shall be amount equal to tax payable or Rs. 12,500/- whichever is less.||If taxable income (i.e. income (minus) deductions and exemptions as above) does not exceeds Rs. 5 lacs, than rebate shall be amount equal to tax payable or Rs. 12,500/- whichever is less.|
Which tax system is better:
In the new tax regime, someone with Rs 7.5 lakh income will have to pay Rs 25,000 and for those who are earning Rs 10 lakh income, the tax saving will be Rs 37,500. But for these savings, you will have to let go all the exemptions and deductions which might nullify these gains.
While figuring out what option to go for might look complicated, if you approach it in a systematic way, it is not that difficult to figure out.
Here is what you need to do –
1. Calculate all the exemptions that you are availing:
If you are living on rent, you would be claiming HRA. Apart from that, other tax-free components include LTA, Food Bill, Phone Bills, etc.
2. Look at the deductions that you claim:
As a salaried employee, two deductions that you automatically get are standard deduction of Rs 50,000 and your contribution towards your Employee provident fund . In the new tax regime, you won’t be able to claim these deductions even though you will continue to contribute to EPF.
Now, combine these exemptions and deductions and minus them from your salary to see what is your taxable income and what it would be if you let go of these deductions. This should be the deciding factor for which regime you should go for.