In the budget for the financial year 2020-21, Finance Minister Nirmala Sitharaman introduced the new income tax rates for tax-payer in India. With the initiation of a new tax regime, there is confusion about which is better for you as a taxpayer and it may find challenging to identify which one of the two tax regimes is better and relevant to your Income.
FY 2020-21 onwards, the taxpayer can choose the best tax regime based on the tax-saving potential, practicality, and immediate needs. Here is the difference between Old and New Tax Regime.
Budget 2020
The budget 2020, saw the finance minister Nirmala Sitharaman announce a new tax regime with more tax slabs and lower tax rates. This was long demanded by most taxpayers, but it came up with the catch of removal of all the deductions and exemptions available.
In the Budget 2020 speech, the finance minister said that the current Income Tax Slab is full of various exemptions and deductions that make compliance and a burdensome process for the taxpayers.
Though the removal of the tax deductions and exemptions would make the compliance less tedious, those who have maintained their financial portfolio to avail of tax deductions as per the old slab are likely to pay more tax under the new tax slabs.
The new budget tries to curtail the option to save the incentives and puts more money in the hands of taxpayers. However, the individual and HUF are given an option to choose between the old and new tax regimes.
Difference between Old and New Tax Regime
The New Tax Regime was introduced vide section 115BAC, which is applicable to individual and HUF assessee only and allows them to pay tax at lower rates. Under the New Tax Regime, the taxpayer has an option to choose either of the following:
1) To pay tax at lower rates as per the new regime on the condition that they forego certain permissible exemptions and deductions available under Income Tax.
2) To continue to pay taxes under the existing tax rates. The assessee can avail of rebates and exemption by staying in the old regime and paying tax at the existing higher rate.
As we discussed, the new tax regime is applicable only to Individual and HUF assessee, so here is the Difference between Old and New Tax Regime only for individual and HUF.
Tax Slab Rates
Tax Slab For AY 2021-22 and AY 2022-23- It is to be noted that as per budget 2021, there is no change in the Income Tax Slab applicability (Old as well as new) and the same Income Tax Slab will be applicable for 2022 (AY 2022-23). Accordingly, there is no difference between the tax slabs of both years for individual and HUF assessee.
New Tax Regime Tax Slab Rates
Under the new tax regime, the tax slab is the same for all categories of individuals, i.e. Individual & HUF up to 60 years of age, senior citizens above 60 years up to 80 years, and super senior citizens above 80 years. Hence no increased basic exemption limit benefit will be available to senior and super senior citizens in the new tax regime.
| New Income Tax Slab | Income Tax Rates for All individuals and HUF |
|---|---|
| upto Rs. 2,50,000 | NIL- No Tax |
| Rs. 2,50,001 to Rs. 5,00,000 | 5 % (Tax Rebate u/s 87a is available) |
| Rs. 5,00,001 to Rs. 7,50,000 | 10% |
| Rs. 7,50,001 to Rs. 10,00,000 | 15% |
| Rs. 10,00,001 to Rs. 12,50,000 | 20% |
| Rs. 12,50,001 to Rs. 15,00,000 | 25% |
| Above Rs. 15,00,000 | 30% |
Note 1- The taxpayer opting for concessional rates in the New Tax Regime will have to forgo certain exemptions and deductions available in the existing old tax regime.
Note 2:- A tax rebate under section 87A is allowed to individual taxpayers for a maximum amount of Rs. 12,500 if the total income is up to Rs. 5,00,000. The amount of rebate shall be 100% of the Income Tax or Rs. 12,500 whichever is less. (New Regime)
Old Tax Regime Tax Slab Rates
The Old Tax Slabs are different for all categories of individuals, i.e. Individual & HUF up to 60 years of age, senior citizens above 60 years up to 80 years, and super senior citizens above 80 years.
Income Tax Rates for Individual (Age below 60 years) & HUF
| Income Tax Slab | Rates |
|---|---|
| upto Rs. 2,50,000 | NIL- No Tax |
| Rs. 2,50,000 to Rs. 5,00,000 | 5 % of total income exceeding Rs. 2,50,000 |
| Rs. 5,00,001 to Rs. 10,00,000 | Rs. 12,500 + 20% of total income exceeding Rs. 5,00,000 |
| Above Rs. 10,00,000 | Rs. 1,12,500 + 30% of total income exceeding Rs. 10,00,000 |
Income Tax rates for Senior Citizen (Age 60 years to 80 years)
| Income Tax Slab | Rates |
|---|---|
| upto Rs. 3,00,000 | NIL- No Tax |
| Rs. 3,00,000 to Rs. 5,00,000 | 5 % of total income exceeding Rs. 3,00,000 |
| Rs. 5,00,001 to Rs. 10,00,000 | Rs. 10,000 + 20% of total income exceeding Rs. 5,00,000 |
| Above Rs. 10,00,000 | Rs. 1,10,000 + 30% of total income exceeding Rs. 10,00,000 |
Income Tax rates for Super Senior Citizen (Age above 80 years of age)
| Income Tax Slab | Rates |
|---|---|
| upto Rs. 5,00,000 | NIL- No Tax |
| Rs. 5,00,001 to Rs. 10,00,000 | 20% of total income exceeding Rs. 5,00,000 |
| Above Rs. 10,00,000 | Rs. 1,00,000 + 30% of total income exceeding Rs. 10,00,000 |
The following points are also applicable-
Note 1:- An additional 4% health & education cess will be applicable to the tax amount calculates as above. (Both Regime)
Note 2:- A tax rebate under section 87A is allowed to individual taxpayers (Age below 60 years) for a maximum amount of Rs. 12,500 if the total income is up to Rs. 5,00,000. The amount of rebate shall be 100% of the Income Tax or Rs. 12,500 whichever is less. (Old Regime)
Note 3:- A tax rebate under section 87A is allowed to individual taxpayers (Age 60 or 60 + but below 80 years) for a maximum amount of Rs. 10,000 if the total income is up to Rs. 5,00,000. The amount of rebate shall be 100% of the Income Tax or Rs. 10,000 whichever is less. (Old Regime)
Note 4:- There is no change in the surcharge, it will remain the same for both of the regimes of tax. It will be calculated over the income tax (subject to marginal relief) as per the below table- (Both Regime)
| Income Limit | Surcharge rate on amount of Income Tax |
|---|---|
| Net income exceed Rs. 50 Lakhs but does not exceed Rs. 1 Crore | 10% |
| Net Income exceed Rs. 1 Crore but does not exceed Rs. 2 Crore | 15% |
| Net Income exceed Rs. 2 Crore but does not exceed Rs. 5 Crore | 25% |
| Net Income exceed Rs. 5 Crore | 37% |
Deduction and Exemptions Applicability
Deductions mean removing certain investments and expenditures, the taxpayers make and then calculating the gross total income. Exemptions mean the taxpayer is free from the tax burden on certain incomes.
The new tax regime does not allow the taxpayers to avail themselves of certain deductions and exemptions whereas the old tax regime provides that the taxpayers can claim deductions and exemptions which are available to them. Under the old tax regime, there are 100+ exemptions and deductions but taxpayers do not benefit from all of them. Most of them complicate the direct tax system.
After a thorough study, the ministry of finance has removed around 70 exemptions. Some important deductions and exemptions that would not be available in the new tax regime of income tax are given here-
| Leave Travel Allowance |
| House Rent Allowance |
| Professional tax paid by a maximum of Rs. 2,500 |
| Standard Deduction of Rs. 50,000 that was available for salaried individual |
| Section 80TTA/80TTB- Interest From Saving Account Deposits |
| Entertainment allowance deductions and professional tax for government employee |
| The option to carry forward or unabsorbed depreciation of earlier years |
| Option of additional depreciation under section 32 (ii) (a) of the Income Tax Act |
| Tax relief on interest paid on home loan for self-occupied or vacant property u/s 24 |
| Deduction of Rs. 15,000 allowed from family pension under clause (iia) Section 57 |
| 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 popular tax saving investment options include ELSS, NPS, PPF, tax break on insurance premium among others. |
A total of 50 exemptions are retained in the new tax regime that is allowable. Some important exemptions are here-
| Income From Life Insurance |
| Agriculture Income |
| Standard Deduction on Rent |
| Retrenchment Compensation |
| Gratuity received from employer up to a maximum amount of Rs. 20 Lakh |
| Leave encashment on retirement |
| Interest and maturity amount of PPF of Sukanya Smriddhi Yojna |
| VRS proceeds up to Rs. 5 Lakh |
| Death cum retirement benefits |
| Money received for scholarships for education, etc. |
Some Important Points
🎯 Under New Tax Regime, the taxpayer need not worry about the documentation and compliances as most of the exemptions are not available. Whereas the taxpayers under the old regime need to have all the proofs, and in many cases, the employee needs to submit such proofs to the employer for claiming deductions and exemptions.
🎯 There is no change in the surcharge, it will remain the same as the old one.
🎯 As per the finance minister, a taxpayer with an annual income of Rs. 15 Lakhs can save Rs. 78000 under the new tax regime. But if you are the saving king then do stick to the old tax regime.
How to choose between the new tax regime and the old tax regime
There is a lot of confusion, regarding which regime to pick. But selecting the right regime helps in optimizing taxes and wealth creation in the future. The taxpayer needs to evaluate both the regimes depending on the income, deductions, exemptions, etc., and select the right regime. But before opting or opt-out between the two following are important to read-
Salaried Person- For this purpose, a salaried person is free to opt-in or opt-out every year. He is only required to intimate his employer about his choice and the employer has to deduct TDS according to the employee choice.
Non-Salaried Person- A non-salaried person, has to make his choice at the time of filing his return. They are not required to intimate anyone during the year. However, a non-salaried taxpayer has no option to change his choice every year. It means once a non-salaried person opt-out of the new tax regime, they can not opt-in again for the new tax regime in the future.
***For tax planning purposes, a taxpayer needs to make a comparison between old and new tax regimes according to his estimated income of that financial year. Once the taxpayer chooses the right tax regime, the investment TDS or advance tax payable calculations are made accordingly.
Conclusion
The first good point about the new system is that it is not completely replacing the old system or rather a current system. The government is not forcing the new rates and the new direct tax system on the taxpayers.
Difference between Old and New Tax Regime- The changes introduced don’t really make things easier for Indian taxpayers. However, there is one thing you need to be careful about. Whether you pick the new or old tax regime should not decide if you should invest and get insurance. Achieving your life goals and securing your family’s future should be the reasons driving your decision to invest and purchase and insurance, not the tax benefits you get from them.
Frequently Asked Questions- FAQs
-
What is the difference between new tax regime and old tax regime?
Difference Between Old and New Tax Regime- The New Tax Regime was introduced vide section 115BAC, which is applicable to individual and HUF assessee only and allows them to pay tax at lower rates. Under the New Tax Regime, the taxpayer has an option to choose either of the following:
1) To pay tax at lower rates as per the new regime on the condition that they forego certain permissible exemptions and deductions available under Income Tax.
2) To continue to pay taxes under the existing tax rates. The assessee can avail of rebates and exemption by staying in the old regime and paying tax at the existing higher rate. -
What is new tax regime?
Under the new tax regime, the tax slab is the same for all categories of individuals, i.e. Individual & HUF up to 60 years of age, senior citizens above 60 years up to 80 years, and super senior citizens above 80 years. Hence no increased basic exemption limit benefit will be available to senior and super senior citizens in the new tax regime.
-
Is new tax regime good or bad?
The first good point about the new system is that it is not completely replacing the old system or rather a current system. The government is not forcing the new rates and the new direct tax system on the taxpayers.
The changes introduced don’t really make things easier for Indian taxpayers. However, there is one thing you need to be careful about. Whether you pick the new or old tax regime should not decide if you should invest and get insurance. Achieving your life goals and securing your family’s future should be the reasons driving your decision to invest and purchase and insurance, not the tax benefits you get from them. -
Is new tax regime mandatory?
The budget 2020, saw the finance minister Nirmala Sitharaman announce a new tax regime with more tax slabs and lower tax rates. This was long demanded by most taxpayers, but it came up with the catch of removal of all the deductions and exemptions available.
In her speech, the finance minister said that the current Income Tax Slab is full of various exemptions and deductions that make compliance and a burdensome process for the taxpayers.
Though the removal of the tax deductions and exemptions would make the compliance less tedious, those who have maintained their financial portfolio to avail of tax deductions as per the old slab are likely to pay more tax under the new tax slabs.
The new budget tries to curtail the option to save the incentives and puts more money in the hands of taxpayers. However, the individual and HUF are given an option to choose between the old and new tax regimes.
-
Can I change tax regime every year?
Before opting or opt-out between the two following are important to read-
Salaried Person- For this purpose, a salaried person is free to opt-in or opt-out every year. He is only required to intimate his employer about his choice and the employer has to deduct TDS according to the employee choice.
Non-Salaried Person- A non-salaried person, has to make his choice at the time of filing his return. They are not required to intimate anyone during the year. However, a non-salaried taxpayer has no option to change his choice every year. It means once a non-salaried person opt-out of the new tax regime, they can not opt-in again for the new tax regime in the future.***For tax planning purposes, a taxpayer needs to make a comparison between old and new tax regimes according to his estimated income of that financial year. Once the taxpayer chooses the right tax regime, the investment TDS or advance tax payable calculations are made accordingly.
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Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author does not own any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.
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