New Tax Regime Versus Old Tax Regime- Analysis & Calculator

It was 1st February 2020, when our Honorable Finance Minister Nirmala Sitharaman had presented the Budget 2020 and came up with paradigm shift in the way Individuals are being taxed i.e. NEW TAX REGIME was introduced vide Sections 115BAC and 115BAD of Income Tax Act 1961.

QUESTION IS: Whether this new tax regime is only for Individuals??

ANSWER:As per the budget 2020 speech, apparently it seems to be YES. But the answer is NO. As new tax structure for companies has already been laid during last year in October.

PART A: NEW TAX REGIME FOR COMPANIES (SECTION 115BAA & 115BAB)

If we go back to September 2019, our Finance Ministry had brought “THE TAXATION LAWS (AMENDMENT) ORDINANCE 2019” where an option has been given to Domestic Companies to opt for new corporate tax rate of 22% (reduced from earlier corporate tax rate of 25% or 30%) by introduction of Section 115BAA. It is nothing but a New Tax Regime for Corporates introduced much before the Budget 2020 to give a boostto our economy at that time and the same is available from F.Y. 2019-20 unlike the new tax regime for individuals which is effective from F.Y. 2020-21.

1. EFFECTIVE TAX RATE UNDER NEW TAX REGIME FOR COMPANIES

To decide whether New Tax Regime should be opted or we shall continue to pay taxes as per Old Tax Regime, firstly we should look at the benefit accruing to us:

REGIME	AMOUNT OF INCOME	BASIC TAX RATE	RATE OF SURCHARGE	HEALTH & EDU. CESS	EFFECTIVE TAX RATE
NEW TAX REGIME	Any Income i.e. from Rupee 1 to Rs. “n” crores	22.00%	10.00%	4.00%	25.17%
OLD TAX REGIME (TURNOVER UP TO RS. 400 CRORES DURING FY2018-19)	Income Up to Rs. 1.00 Crores	25.00%	—	4.00%	26.00%
	Income b/w Rs. 1.00 to 10.00 Crores	25.00%	7.00%	4.00%	27.82%
	Income more than Rs. 10.00 Crores	25.00%	12.00%	4.00%	29.12%
OLD TAX REGIME (TURNOVER EXCEEDS RS. 400 CRORES DURING FY2018-19)	Income Up to Rs. 1.00 Crores	30.00%	—	4.00%	31.20%
	Income b/w Rs. 1.00 to 10.00 Crores	30.00%	7.00%	4.00%	33.38%
	Income more than Rs. 10.00 Crores	30.00%	12.00%	4.00%	34.94%

Illustration 1: If we think of any corporate, whose income is upto Rs. 1 crores, then it will be benefitted to the extent of 0.83% of Total Income in terms of tax reduction if it decides to opt for New Tax Regime.

Illustration 2: If we think of any corporate, whose income is upto Rs. 10 crores, then it will be benefitted to the extent of 2.65% of Total Income in terms of tax reduction if it decides to opt for New Tax Regime.

In the same manner we can look out under which category we are falling in Old Tax Regime and how much it would be beneficial if we shift to New Tax Regime.

Nothing in this world comes free, so cost of availing the benefit under New Tax Regime is indirectly embedded in the conditions imposed as explained hereunder.

2. CONDITIONS FOR OPTING NEW TAX REGIME

Section	Brief Description
10AA	Deduction in respect of units set up in SEZs
32(1)(iia)	Additional Depreciation
32AD	Investment allowance (15%) for units set up in Notified Backward Areas of states Andhra Pradesh/Bihar/Telangana/West Bengal between 1st April 2015 to 31st March 2020
33AB	Deduction for assessees engaged in the business of growing tea/coffee/rubber and who makes deposits are made in NABARD or govt notified accounts.
33ABA	Deduction for assessees engaged in the business of Extraction/Production of Petroleum or Natural Gas and who makes deposits as per scheme notified by Ministry of Petroleum & Natural Gas.
35(1)(ii)	Deduction for payment made to Research Associations for Scientific Research
35(1)(iia)	Deduction for payment made to Company for Scientific Research
35(1)(iii)	Deduction for payment made to certain Institutions for Research in Social Sciences or Statistical Research
35(2AA)	Deduction for payment made to National Laboratory/Universities/IITs for Scientific Research
35(2AB)	Deduction for expenditure incurred on Scientific Research by company itself and as approved by prescribed authority
35AD	Deduction in respect of expenditure on specified business
35CCC	Deduction for Expenditure on agricultural extension project
35CCD	Deduction for Expenditure on skill development project
CHAPTER VI-A	All deductions needs to be foregone i.e. entire series of Section 80 except few deductions which still can be claimed in New Tax Regime: Section – 80GDeduction for donations(only for F.Y. 2019-20) Section – 80JJAA: Deduction in respect of employment of new employees Section – 80M: Deduction in respect of inter-corporate dividends

Below is the list of some benefits/deductions/exemptions which needs to be foregone on availment of New Tax Regime:

KEY NOTE:Carry Forward Losses and Unabsorbed Depreciation from earlier years shall continue to be allowed to be set off against the income under the new tax regime. Provided that such carry forward lossesand unabsorbed depreciation does not arise on account of above listed sections.

3. DECISION RULE: WHICH OPTION IS BENEFICIAL FOR WHOM

It is only after critical cost – benefit analysis we can conclude which of the two regimes is beneficial for us.

• Critical Analysis of Additional Depreciation [32(1)(iia)] to be foregone on adoption of New Tax Regime

In my opinion, loss of benefit of Additional Depreciation is not actually a loss because in real sense it is the future depreciation allowed to businesses in the very first year of investment inPlant & Machinery. Thus even if the benefit of Additional Depreciation is foregone on account of adoption of New Tax Regime, we would be able to claim such depreciation over the years as longas we are using this Plant & Machinery. Only loss on account of this will be the loss of time value of money which shall be compensated by the reduced rate of tax under new tax structure.

In the same manner all the conditions imposed as mentioned at point 2 needs to be critically analysed on facts of the each case to decide amongst the two regimes available.

4. HOW TO OPT FOR THIS NEW TAX REGIME:

Companies willing to adopt New Tax Regime shall file Form No. 10-IC before the due date of filing of return as specified u/s 139(1).This Form 10-IC shall be furnished electronically either under digital signature or electronic verification code.

5. NEWLY ESTABLISHED DOMESTIC MANUFACTURING COMPANIES & NEW TAX REGIME (SECTION 115BAB)

If any of the company is set up on or after 01.10.2019 and is engaged in the business of manufacturing then it could be further eligible for concessional corporate tax rate which shall be as under:

Effective Tax Rate = 15% (Basic Tax) + 10% (Surcharge) + 4% (Health &Edu. Cess) = 17.16%

To opt for this concessional rate of tax, conditions listed below must also be fulfilled in addition to the conditions specified at point no.2:

i) the business is not formed by splitting up, or the reconstruction, of a business already in existence,

ii) company does not use any machinery or plant previously used for any purpose, and

iii) Manufacturing has been commenced on or before 31.03.2023.

6. APPLICABILITY OF MINIMUM ALTERNATE TAX (MAT) PROVISIONS

Any company, willing to opt for New Tax Regime, is exempted from complying with the MAT provisions and any MAT Credit from earlier years should lapse. Companies with brought forward MAT credits need to critically evaluate whether new tax structure would be beneficial or not.

7. OFFSHORE BANKING UNITS AND INTERNATIONAL FINANCIAL SERVICES CENTRE

Such units can opt for new tax structure are per the provisions explained as above and simultaneously such units shall also be eligible for claiming deduction u/s 80LA provided conditions laid therein are complied with.

KEY NOTE: OPTION ONCE AVAILED TO PAY TAXES AS PER NEW TAX REGIME SHALL STAND CONTINUE TO BE APPLICABLE FOR SUBSEQUENT YEARS. THEREAFTER FROM NEW TAX REGIME, YOU CAN COME BACK ONLY ONCE TO OLD TAX REGIME BUT CANNOT OPT FOR NEW TAX REGIME AGAIN.

PART B: NEW TAX REGIME FOR INDIVIDUALS & HUF (SECTION 115BAC)

1. 115BAC is the section that deals with the new income tax regime applicable to individuals and Hindu Undivided Families (HUFs) only. So firstly we shall look at the income tax rates and see how far we are benefitted from this:

Total Income	Old Income Regime Tax Slab Rate	New Income Regime Tax Slab Rate
Nil to Rs. 2.5 lakh	NIL	NIL
Above Rs. 2.5 lakh to Rs. 5 lakh	5%	5%
Above Rs. 5 lakh to Rs. 7.5 lakh	20%	10%
Above Rs. 7.5 lakh to Rs. 10 lakh	20%	15%
Above Rs. 10 lakh to Rs. 12.5 lakh	30%	20%
Above Rs. 12.5 lakh to Rs. 15 lakh	30%	25%
Above Rs. 15 lakh	30%	30%

NOTE: The above rates of Income tax shall be increased by Health & Education Cess and Surcharge as applicable.

2. A key feature of this new regime is that the income tax slab rates have been significantly reduced. So to claim the benefit of lower slab rates, individuals and HUFs must give up the benefit of exemptions/deductions listed as under:

Section	Brief Description
10(5)	Leave travel Allowance
10(13A)	House Rent Allowance
10(14)	Prescribed allowances
16(ia)	Standard Deduction of Rs. 50,000/-
16(ii)	Entertainment allowance for Government Employees
16(iii)	Professional Tax
24(b)	Home Loan Interest (if self-occupied or vacant)
57(iia)	Deduction from Family Pension
Misc Sections	Sections like 10AA, 32(1)(iia), 32AD, 33AB, 33ABA, 35(1)(ii), 35(1)(iia), 35(1)(iii), 35(2AA), 35(2AB), 35AD, 35CCC, 35CCD
CHAPTER VI-A	All deductions needs to be foregone i.e. entire series of Section 80 like 80C, 80CCC, 80CCD(1), 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G etc. EXCEPT only deductions u/s – 80CCD(2), – 80JJAA

3. DECISION RULE: WHICH OPTION IS BENEFICIAL FOR WHOM

It is only after critical cost – benefit analysis we can conclude which of the two regimes is beneficial for us. On a general note, the new tax regime may prove beneficial to those who have not significantly invested in various tax-saving schemes. However individuals who believe in investing for securing the future, old tax regime could be suitable as it allows for various tax exemptions and deductions.

4. An individual/HUF, having no business or professional income, can alter his option of choosing tax regime, every year, based on his deductions at the time of filing of income tax return.

However if individual/HUF is having business or professional income, then option once chosen shall stand applicable for subsequent years. Thereafter from new tax regime, he can come back only once to old tax regime but cannot opt for new tax regime again.

5. INCOME TAX CALCULATOR:

To assist you in determining which one of the two regimes should be opted, you can CLICK HERE which will take you to excel workbook. In excel sheet by just putting the values you can see what is amount of tax liability under both the regimes and thus which of the two tax structures is beneficial to you.

PART C: NEW TAX REGIME FOR CO-OPERATIVE SOCIETY (SECTION 115BAD)

1. INCOME TAX RATES AS PER OLD TAX REGIME IS AS UNDER:

Income Slabs	Tax Rates
Nil to Rs. 10,000	10%
Income between Rs. 10,000 to Rs. 20,000	20%
Income Above Rs. 20,000	30%
* Health & Education Cess @ 4%
**Surcharge @ 12% if income exceeds Rs. 1 Crores

2. INCOME TAX RATES AS PER NEW TAX REGIME IS AS UNDER:

Flat income tax rate has been recommended under new tax structure irrespective of amount of income which is as under:

Tax Rate                               –              22%

Surcharge                            –              10%

Health &Edu Cess            –              4%

EFFECTIVE TAX RATE       –              25.17%

3. Conditions explained as above for companies at Part-A shall apply vis-à-vis for co-operative societies.

PART D: TAX STRUCTURE FOR PARTNERSHIP FIRMS OR LLP

There is NO introduction of any new tax structure for partnership firms or LLP, and such form of entities shall continue to be pay taxes as per the existing tax regime.