As we all now Finance Act 2020 has introduced a New Slab rate for Individuals from Current Financial Year Which has created a lot of confusion regarding which tax regime will be best for us.

Let’s discuss the new tax regime and comparative analysis to resolve the confusion

Applicability

Salaried employees, having no business income, will have to choose between the existing and new tax regime every financial year, as per their convenience.

However, who have business income should carefully evaluate whether they want to continue with the existing tax regime or opt for the new tax regime. This is because once they opt for the new tax regime, then they can switch back to the existing tax regime only once in a lifetime.

What’s New Tax Regime?

Under New Tax Regime Tax slab will be as follows

Tax Rate Total Income
Nil Up to Rs. 2.5 lakhs
5 % Rs. 2.5 Lakhs to 5 Lakhs
10% Rs. 5 lakhs to 7.5 Lakhs
15% Rs. 7.5 Lakhs to 10 Lakhs
20% Rs. 10 Lakhs to 12.5 Lakhs
25% Rs. 12.5 Lakhs to 15 Lakhs
30% Above Rs. 5 Lakhs

Cess and Surcharge remains Same in both old and New Tax regime

But there is a condition to avail new tax regime that you cannot take benefit of any deduction while calculating Total Income like 80C, 80D, HRA or Standard Deduction of Rs. 50000/-.

Some 50 tax exemptions have been left untouched in the Budget. These include:

  • Standard deduction on rent: 30% of the rent received
  • Agricultural income: No limit
  • Income from life insurance: If insurance cover is 10 times the annualised premium
  • Retrenchment compensation: Rs 5 lakh
  • VRS proceeds: Rs 5 lakh
  • Leave encashment on retirement: Rs 3 lakh (No limit for govt workers)

Now Most Important Question Which Slab to choose

There is no definite formula it varies from person to person. The more exemptions and deductions you want to claim the old slab will be best and fewer the deductions or exemptions are New Slab will be best.

Let’s Discuss through an illustration

Person 1- Anita (Age less than 60 years) who earn 80000 per month and claims following deductions

  • standard deduction- Rs. 50,000
  • 80C Deduction- Rs. 1.5 lakhs
  • 80 D Deduction- Rs. 25,000

Her tax liability under both the regime will be as follows

Old Tax Regime (Rs.) New Tax Regime (Rs.)
Gross Salary 9,60,000 9,60,000
Less: Standard Deductions 50,000 N. A
Gross Total Income 9,10,000 9,60,000
Less: Chapter VI A Deductions
  • U/s 80C (PPF, LIC Premium, NPS etc..)
1,50,000 N. A
  • U/s 80D
25,000 N. A
Total Income 7,35,000 9,60,000
Tax 61,880 71,760

For her old Tax regime will be beneficial

Person 2: Anish (Age less than 60 years) who earn 80000 per month and claims following deductions

  • standard deduction- Rs. 50,000
  • 80C Deduction- Rs. 1 lakh
  • 80 D Deduction- Rs. 10,000

His tax liability under both the regime will be as follows

Old Tax Regime (Rs.) New Tax Regime (Rs.)
Gross Salary 9,60,000 9,60,000
Less: Standard Deductions 50,000 N. A
Gross Total Income 9,10,000 9,60,000
Less: Chapter VI A Deductions
· U/s 80C (PPF, LIC Premium, NPS etc..) 1,00,000 N. A
·U/s 80D( Health Insurance Premium) 10,000 N. A
Total Income 8,00,000 9,60,000
Tax 75,400 71,760

For him, New slab rate will be beneficial.

In both the cases income of both the person is same but their deductions are different this is why for Anita Old slab is beneficial and For Anish New Slab Rate is Beneficial. The reason for the difference despite earning the same income is that there are no specific criteria to find which regime is better. It’s all depends upon how much exemptions and deduction you claim.

To conclude:

New Tax Regime Will Be beneficial if you have Fewer deductions and Exemptions to claim.

Old Tax Regime will be beneficial if you have More Deductions and Exemptions to claim

Thanks for reading till the end.

Author Bio

Qualification: Student - CA/CS/CMA
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Location: New Delhi, IN
Member Since: 26 Dec 2019 | Total Posts: 3

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