INTRODUCTION: The new tax regime introduced by Budget 2020 for individual taxpayers provide for concessional tax rates with reference to tax rates in the old regime. The new tax regime has lower income tax rates for income up to 15 lakh but what needs to be focused upon is that lower income tax rates are available only if a taxpayer is willing to give up exemptions and deductions available under various provisions of Income tax act, 1961. Since, most exemptions and deductions are not available which reduces the associated compliance and documentation, the assessment of which regime holds an upper hand is of utmost importance. Salaried individuals are granted an option to choose between old and new scheme at the time of making their tax declaration to employer for the purpose of TDS. Having said that, even if any individual chooses one option at the time of making declaration to employer for TDS, he is free to change the option and select another one, at the time of filing the ITR. Salaried individuals and pensioners would be eligible to switch between new tax regime and old tax regime as per their convenience every year, provided they don’t have business income. However, other individuals with business income can switch back to old tax regime but only once in a lifetime.

Example – Consultants whose income is chargeable under the head profits and gains from business and profession.

SLAB RATES UNDER NEW V/S OLD TAX REGIME

INCOME SLABS TAX  RATE(UNDER OLD SYSTEM) TAX RATE (UNDER NEW SYSTEM) WITHOUT EXEMPTIONS AND DEDUCTIONS
Up to 2.5 lakh NIL NIL
2.5-5 Lakh 5% 5%
5-7.5 Lakh 20% 10%
7.5-10 Lakh 20% 15%
10-12.5 Lakh 30% 20%
12.5-15 Lakh 30% 25%
Above 15 Lakh 30% 30%

NOTE: The above rates mentioned do not include surcharge and cess. Tax rates under old regime have been taken for residents up to 60 years of age. While the old regime had different tax slabs for different age groups, new tax does not provide the varied tax slabs on basis the age groups.

EXEMPTIONS AND DEDUCTIONS TO BE FOREGONE BY A SALARIED INDIVIDUAL UNDER NEW REGIME

New tax regime requires taxpayer to forego exemptions and deductions which are listed down as follows:

  • Standard deductione. Rs 50,000 u/s 16 of Income tax act
  • Deduction U/s 80C which is maximum 150,000.
  • Deduction U/s 24 for interest on loan to a maximum of Rs 200,000/-
  • Entertainment allowance and professional tax deduction for Govt. employees U/s 16(ii)
  • Leave travel allowance
  • House rent allowance depending on salary structure and rent paid
  • Medical insurance premium: Rs 25,000 and Rs 50,000 for parents and senior citizens
  • Savings bank interest: Rs 10,000 under Sec 80TTA
  • Interest income (for senior citizens): Rs 50,000 under Sec 80TTB
  • Interest on education loan -deduction for 8 consecutive years U/s 80E
  • Treatment of self or dependent for specified disease: Rs 40,000 (Rs 1 lakh for senior citizens) and treatment of disability of self or dependant: Rs 75000 to Rs 1,25,000 depending on disability U/s 80D and  U/s  80 DDB.
  • Donations to specified entities: 50-100% of the amount donated u/s 80G

HENCE a taxpayer has to forego all Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) (Except, deduction under Section 80CCD(2)—employers contribution to NPS, and Section 80JJA) and so on.

These tax saving investment options include ELSS, NPS, PPF, tax break on insurance premium among others. 

SCENARIO ANALYSIS OF OLD AND NEW TAX REGIME ON THE BASIS OF BREAKEVEN OF INVESTMENTS MADE

GROSS INCOME (A) TAX UNDER NEW SYSTEM EXCLUDING CESS(B) BREAK-EVEN DEDUCTIONS( INC STANDARD DEDUCTION) TO MAINTAIN EQUILLIBRIUM WITH NEW TAX(C) TAX  UNDER OLD SYSTEM AFTER CONSIDERING DEDUCTIONS UNDER (C)
6,00,000 22,500 50,000 22,500
6,50,000 27,500 75,000 27,500
7,00,000 32,500 1,00,000 32,500
7,50,000 37,500 1,25,000 37,500
8,00,000 45,000 1,37,500 45,000
8,50,000 52,500 1,50,000 52,500
9,00,000 60,000 1,62,500 60,000
9,50,000 67,500 1,75,000 67,500
10,00,000 75,000 1,87,500 75,000
10,50,000 85,000 1,87,500 85,000
11,00,000 95,000 1,87,500 95,000
11,50,000 1,05,000 1,87,500 1,05,000
12,00,000 1,15,000 1,91,667 1,15,000
12,50,000 1,25,000 2,08,333 1,25,000
13,00,000 1,37,500 2,16,667 1,37,500
13,50,000 1,50,000 2,25,000 1,50,000
14,00,000 1,62,500 2,33,333 1,62,500
14,50,000 1,75,000 2,41,667 1,75,000
15,00,000 and Above >=1,87,500 2,50,000 >=1,87,500

Note: Under Sec 87A, individuals with total income (after deductions) that do not exceed Rs.5 lakhs can claim a rebate of Rs.12500 which has been maintained in new taxation regime also. Cess has been ignored while calculating taxes as it is common in both old and new taxation regime @ 4%.

  • The table given above illustrates the break-even investments to be made by a taxpayer in which he shall be INDIFFERENT towards old and new taxation regime.
  • Higher than the breakeven; if the taxpayer has any deductions and exemptions he should opt for old taxation regime to cut short on taxes and have higher disposable income.
  • If a taxpayer has lower deductions and exemptions than the breakeven mentioned above he should opt for new taxation regime as they offer lower tax rates.
  • Not everyone might invest in the same manner to save tax. If a person is not benefiting from the exemptions, he/she can choose the new regime.

For E.g. Mr. A gets salary of 15 lakhs and he has deduction u/s 80C amounting to Rs 1,50,000, standard deduction of Rs 50000 and also HRA of 60,000.  Since he has deductions higher than the break-even point of 2,50,000 he’ll save taxes under old taxation regime.

COMPARISON OF TAXATION ON THE BASIS OF QUANTUM OF DEDUCTIONS

PARTICULARS LOW DED UCTI ONS MEDIUM DE DU CTIONS HIGH DE DUC TIONS VERY HIGH DED UCT IONS BREAK EVEN DEDUCTIONS
GROSS SALARY 16,00,000 16,00,000 16,00,000 16,00,000 16,00,000
HRA EXEMPTION 3,60,000
STANDARD DEDUCTION 50,000 50,000 50,000 50,000 50,000
LOSS FROM HOUSE  PROPERTY 2,00,000
GROSS TOTAL INCOME 15,50,000 15,50,000 13,50,000 11,90,000 15,50,000
DEDUCTIONS U/s 80C 1,50,000 1,50,000 1,50,000 1,50,000
DEDUCTION U/s 80D 50,000 50,000
NET TAXABLE INCOME 15,50,000 14,00,000 12,00,000 9,90,000 13,50,000
TAX AT OLD RATES 2,88,600 2,41,800 1,79,400 1,14,920 2,26,200
TAX AT NEW RATES 2,26,200 2,26,200 2,26,200 2,26,200 2,26,200
GAIN/(LOSS) UNDER NEW REGIME 62,400 15,600 (46,800) (1,11,280) TAX AMOUNTS AT EQUIL LIBRIUM AS DEDU CTONS EQUAL TO 2,50,000.

POINTS TO BE NOTED:

  • A person availing NO deductions under the existing taxation regime should opt for new taxation regime as it will bring him higher disposable income under new taxation regime because of lower taxation rates. Additional savings on tax can then be spent or saved accordingly.
  • A person availing deductions like up to 2 lacs (like standard deduction and Deduction U/s 80C) he should also opt for new taxation regime to save more tax after considering that he invests more than the break even as shown in previous table.
  • A person availing very high deductions like HRA, 80C, 80D shall be benefitted under old taxation regime by claiming those deductions and saving money.

CONCLUSION:

Both taxation regimes have their own pros and cons. The old taxation regime inculcates habit of investing in a taxpayer. New taxation regime is better for employees with less salary and less investments resulting in lesser deductions and exemptions. New taxation regime is cleaner and simple involving lesser or no documentation and lesser chances of fraud for tax evasion. Everyone will have their own set of deductions and exemptions so need to assess comparatively both the regimes to see what works best for them.

The new income tax regime will suit those who don’t claim too many deductions or want to avoid the paperwork of tax planning. This could include non-salaried taxpayers (including consultants) who are not eligible for exemptions and deductions under Chapter VI-A. It could also include senior citizens who do not draw pension from their employer and are therefore not eligible for the standard deduction of Rs 50,000. However, senior citizens earn a big portion of their income from interest and enjoy an exemption of Rs 50,000 for interest income under the newly introduced Section 80TTB. They will be better under existing regime.

DISCALIMER: The above post is only for the purpose of academic discussion and should not be construed as any legal opinion in any matter whatsoever.

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