The government of India introduced a new tax regime effective from 1 April 2020 for the financial year (FY) of 2020–21. Under this new tax regime, taxpayers may be able to avail of lowered tax rates by forgoing certain tax exemptions or deductions available under the old tax regime. It is crucial to understand which regime to use—old or new—to save the most tax.
The importance of income tax slabs
The income of taxpayers is divided into slabs having varying ranges of income. Each tax slab has a tax rate attached to it. Income tax slabs are classified according to the categories of taxpayers as per the following:
- Individuals (residents and non-resident Indians or NRIs) - under 60 years
- Senior citizens - 60 to 80 years (residents only)
- Super senior citizens - over 80 years (residents only)
Income tax slabs under old tax regime vs new tax regime
|
Income Tax Slab |
Old Tax Regime Slab Rates for FY 2020-21 (Assessment Year 2021-22) % |
New Tax Regime Slab Rates for FY 2020-21 (Assessment Year 2021-22) % |
||
|
Resident Individuals and NRIs under 60 years |
Resident Senior Citizens |
Resident Super Senior Citizens |
Applicable to all taxpayers |
|
|
Rs 0 to Rs 2,50,000 |
ZERO |
ZERO |
ZERO |
ZERO |
|
Rs 2,50,000 to Rs 3,00,000 |
5% (althought tax rebate allowed u/s87A) |
ZERO |
ZERO |
5% (althought tax rebate allowed u/s 87A) |
|
Rs 3,00,000 to Rs 5,00,000 |
5% (althought tax rebate allowed u/s 87A) |
ZERO |
||
|
Rs 5,00,000 to Rs 7,50,000 |
20% |
20% |
20% |
10% |
|
Rs 7,50,000 to Rs 10,00,000 |
20% |
20% |
20% |
15% |
|
Rs 10,00,000 to Rs 12,50,000 |
30% |
30% |
30% |
20% |
|
Rs 12,50,000 to Rs 15,00,000 |
30% |
30% |
30% |
25% |
|
More than Rs 15,00,000 |
30% |
30% |
30% |
30% |
Deductions and exemptions removed under the new tax regime:
The new tax regime has been simplified and does away with 70 deductions and exemptions that make filing taxes a cumbersome process. The following are the most commonly used ones that have been removed:
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Conveyance Allowance
- Allowance for relocation, helper, etc.
- Daily expenses during employment
- Professional Tax
- Standard deduction available on the salary
- Interest on home loan
- Deductions under Chapter VI A except Section 80CCD(2) – including deductions under Section 80C for repayment of home loan principal, life insurance premium, contribution to Public Provident Fund (PPF), etc.
Comparison of old tax regime vs new tax regime:
Here is an example of a taxpayer, Rohit who earns an income of Rs 40 lakh, which falls under the highest tax slab of 30%:
|
|
Income and exemptions |
Old Tax Regime (Rs) |
New Tax Regime (Rs) |
|
a |
Income from Salary |
40,00,000 |
40,00,000 |
|
b |
Income from Interest |
10,000 |
10,000 |
|
c |
HRA exemption |
1,50,000 |
Not applicable |
|
d |
LTA exemption |
50,000 |
Not applicable |
|
e |
Standard Deduction |
50,000 |
Not applicable |
|
f |
Deduction under Section 80C for PF, insurance, ELSS, etc. |
1,50,000 |
Not applicable |
|
g |
Deduction under Section 80D for health insurance premium |
25,000 |
Not applicable |
|
h |
Deduction of interest U/S 80TTA |
10,000 |
Not applicable |
|
|
Gross total income |
37,60,000 |
40,10,000 |
|
|
Net Deductions |
1,85,000 |
0 |
|
|
Net taxable income |
35,75,000 |
40,10,000 |
|
|
|
|
|
|
|
Tax Calculations |
Old Tax Regime (Rs) |
New Tax Regime (Rs) |
|
1 |
Rs 0 to Rs 2.5 Lakhs |
0 |
0 |
|
2 |
Rs 2.5 Lakhs to Rs 5 Lakhs |
=5% of 2,50,000 + 4% Cess = 12,500 + 500 = Rs 13,000 |
=5% of 2,50,000 + 4% Cess = 12,500 + 500 = Rs 13,000 |
|
3 |
Rs 5 Lakhs to Rs 7.5 Lakhs |
=20% of 2,50,000 + 4% Cess = 50,000 + 2,000 = 52,000 |
=10% of 2,50,000 + 4% Cess = 25,000 + 1,000 = 26,000 |
|
4 |
Rs 7.5 Lakhs to Rs 10 Lakhs |
=20% of 2,50,000 + 4% Cess = 50,000 + 2,000 = 52,000 |
=15% of 2,50,000 + 4% Cess = 37,500 + 1,500 = 39,000 |
|
5 |
Rs 10 Lakhs to Rs 12.5 Lakhs |
=30% of 2,50,000 + 4% Cess = 75,000 + 3,000 = 78,000 |
=20% of 2,50,000 + 4% Cess = 50,000 + 2,000 = 52,000 |
|
6 |
Rs 12.5 Lakhs to Rs 15 Lakhs |
=30% of 2,50,000 + 4% Cess = 75,000 + 3,000 = 78,000 |
=25% of 2,50,000 + 4% Cess = 62,500 + 2,500 = 65,000 |
|
7 |
More than Rs 15 Lakhs |
=30% of Remaining 20,75,000 + 4% Cess = 6,22,500 + 24,900 = 6,47,400 |
=30% of Remaining 25,10,000 + 4% Cess = 7,53,000 + 30,120 = 7,83,120 |
|
|
Total Tax Payable |
=Rs 8,85,000 + Rs 35,400 = Rs 9,20,400 |
=Rs 9,40,500 + Rs 37,620 = Rs 9,78,120 |
So, the old tax regime is more beneficial to Rohit as his total tax amount is lower under this regime.
Which one to choose?
Both the old and the new tax regimes have their pros and cons. It is up to each taxpayer to assess their situation and choose the one saving the most tax. The new tax regime is more suited for taxpayers with lower salaries and zero or limited investments. Fewer investments equal fewer deductions and exemptions to avail.
With the old tax regime, taxpayers may feel restricted as the tax exemptions are available on select investments having specific lock-in periods. So, taxpayers who prefer higher liquidity, as well as flexible and open-ended investments, may opt for the new tax regime.
Higher-income taxpayers may find that they benefit from the old tax regime. If you already have tax-saving investments and insurance then you may benefit more from the old tax regime.
The bottom line
Salaried taxpayers have the option of switching between the two regimes every year. Self-employed taxpayers can switch back from the new regime to the old one only once. Moreover, they can only switch back to the new tax regime again when their business income stops completely. It is advisable for all taxpayers to calculate their taxable income under both regimes using a tax calculator before committing to one.