Important points to decide between New Income Tax Rate and Old Tax Rate regime

Author: Riya Thawani

The Finance Minister Nirmala Sitharaman in Budget 2020 introduced new Income Tax regime. In New Income Tax regime, there is an option for individuals and HUF (Hindu Undivided Family) to pay taxes at lower rates. They have to select the Tax regime for the year in the beginning of the Financial Year (FY).

Now, many are confused which option to chose for. However, the answer to such question is quite complex and it need to be assessed on the basis of your Income and Deductions that you are claiming so as to decide which option would be beneficial. This article will help you to reach to a decision.

Difference in slab rates between new and old tax regime for Individuals less than 60 years and HUFsIncome Tax SlabOld rateNew RateUpto Rs. 2.5 LakhNilNilRs. 2.5 lakh to Rs. 5 lakh5%5%Rs. 5 lakh to Rs. 7.5 lakh20%10%Rs. 7.5 lakh to Rs. 10 lakh20%15%Rs. 10 lakh to Rs. 12.5 lakh30%20%Rs. 12.5 lakh to Rs. 15 lakh30%25%Rs 15 lakh and above30%30%

In both the schemes, Income Tax calculated will be subject to cess @ 4% and surcharge as follows-

Net IncomeSurcharge RateExceeds Rs. 50 Lakh but upto Rs. 1 Crore10%Exceeds Rs. 1 Crore but upto Rs. 2 Crore15%Exceeds Rs. 2 Crore but upto Rs. 5 Crore25%Exceeds Rs. 5 Crore37%

Lets analyse the differences between two schemes with the examples. The examples below will give a clear picture whether to opt for New or Old rate on the basis of deductions availed by you.

Example 1 : When a person have done lot of tax saving investments available for deductions.ParticularsOldNewGross Salary7,50,0007,50,000-Standard Deduction(50,000)–Income from Salary7,00,0007,50,000Less: Deduction from Salary Interest on House loan(2,00,000)–Professional Tax(2,400)–Gross Total Income4,97,6007,50,000Less: Deductions 80C(1,50,000)–80D(50,000)–80JJA(50,000)(50,000)Taxable Income2,47,6007,00,000Income Tax on Upto Rs. 2,50,000ExemptExemptRs. 2,50,000 to Rs. 5,00,000 – 12,500Rs. 5,00,000 to Rs. 7,50,000 – 20,000Rs. 7,50,000 to Rs. 10,00,000 – – Total Tax (Before Cess)– 32,500

In above example, if an assessee has invested amount in investments or scheme which are deductible under chapter VI-A deductions or any other deductions, then he should opt for Old scheme so as to claim deductions and lower the tax amount.

Example 2 : When a person have done less tax saving investments available for deductions.ParticularsOldNewGross Salary7,50,0007,50,000-Standard Deduction(50,000)–Income from Salary7,00,0007,50,000Less: Deduction from Salary Interest on House loan––Professional Tax(2,400)–Gross Total Income6,97,6007,50,000Less: Deductions 80C(1,50,000)–80D––80JJA––Taxable Income5,47,6007,50,000Income Tax on Upto Rs. 2,50,000ExemptExemptRs. 2,50,000 to Rs. 5,00,000 12,500 12,500Rs. 5,00,000 to Rs. 7,50,0009,52025,000Rs. 7,50,000 to Rs. 10,00,000 – – Total Tax (Before Cess)22,020 37,500

As shown in above example, by claiming deduction of Rs. 1,50,000, Income Tax amounts Rs. 22,020 lower than the New Tax Regime.

Example 3 : When a person have done no tax saving investments available for deductions.ParticularsOldNewGross Salary7,50,0007,50,000-Standard Deduction(50,000)–Income from Salary7,00,0007,50,000Less: Deduction from Salary Interest on House loan––Tax on Employment(2,400)–Gross Total Income 6,97,6007,50,000Less: Deductions 80C––80D––80JJA––Taxable Income6,97,6007,50,000Income Tax on Upto Rs. 2,50,000ExemptExemptRs. 2,50,000 to Rs. 5,00,00012,50012,500Rs. 5,00,000 to Rs. 7,50,000 39,520 25,000Rs. 7,50,000 to Rs. 10,00,000 – – Total Tax (Before Cess)52,02037,500

Thus, if you are not claiming any of the deductions then it would be beneficial to opt for New tax rate regime. As it would reduce your tax by Rs. 14,520 (Rs. 52,020-Rs. 37,500) as calculated above due to lower tax rates in new tax rate regime.

Important Points in Deciding the tax slab rate
  1. In light of the above examples and considering the new personal tax regime wherein certain deductions and exemptions would not be available, the taxpayers may evaluate both the regimes.
  2. Any taxpayer, who is looking for flexibility in the investment choices and does not want to invest in the specified eligible instruments, may consider opting for the new tax regime.
  3. It is notable that the choice can be changed every year and any regime which is beneficial can be adopted by the individual.
  4. Individuals who have income from business or profession cannot switch between the new and old tax regimes every year. If they opt for the new taxation regime, such individuals get only one chance in their lifetime to go back to the old regime. Further, once switched back to existing tax regime, they will not be able opt for new tax regime unless their business income ceases to exist.
  5. In New Income tax regime, slab rate for non- senior citizens Individual, Senior citizen as well as Very Senior citizens are same.
  6. It is important to note that the department has brought out a tax comparison utility, which is available on their web portal and in which, an individual taxpayer can evaluate which option is better for them.
Deductions not available in new scheme.

In new tax rate scheme, approx. 70 deductions have been disallowed out of more than 100 deductions available in old Scheme.

Exemptions and Deductions available in new tax regime-For full article reach us at-
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