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NEW TAX REGIME VS OLD TAX REGIME: MAKE THE RIGHT CHOICE

NEW TAX REGIME VS OLD TAX REGIME: MAKE THE RIGHT CHOICE

The Central Board of Direct Taxes on April 13, 2020 issued a circular directing the employees to inform his/her employer of his/her intention to opt for new tax regime for the ongoing FY 2020-21. The employer have to deduct taxes from the employees salary accordingly.

The Finance Minister said in the Union Budget Speech for the Fiscal Year 2020-21 that the Current Income Tax Act is full of various exemptions and deductions that make the compliance’s complicated and a burdensome process for the taxpayers.Hence, for individual taxpayers, a new tax regime was announced with lower tax rates and more tax slabs but it came with a catch of forgoing certain specified deductions and exemptions available.

And if you are wondering how to figure out the right tax regime you should opt for, this article answers all your questions. You can consider the following points to decide which regime would work better.

Income Tax Rates under New & Old Tax Regime:

 

Income Slabs (in Rs.)

New Regime Old Regime
Rate of Tax*(%) Rate of Tax* (%)
UptoRs. 2.5 lakh NIL NIL
Rs. 2.5 lakh to Rs. 5 lakh 5 5
Rs. 5 lakh to Rs. 7.5 lakh 10 20
Rs. 7.5 lakh to Rs. 10 lakh 15 20
Rs. 10 lakh to Rs. 12.5 lakh 20 30
Rs. 12.5 lakh to Rs. 15 lakh 25 30
Rs. 15 lakh and above 30 30
*Rates of Surcharge and Health and Education Cess will remain same under both cases

Listed below are the Exemptions and Deductions that will not be available under the new tax regime:

Deductions and exemptions allowed under the New Tax Regime Deductions and exemptions not allowed under the New Tax Regime
Standard Deduction on Rent: 30% of Rent Received Standard Deduction available on Salary Income i.e 50,000
Employers Contribution to NPS u/s 80CCD(2) House Rent Allowance
VRS Proceeds: Rs. 5,00,000 Housing Loan Interest in respect of Self Occupied/Vacant Property
Agricultural Income Investments under 80C (apart from employer’s contribution to NPS): Rs.1,50,000
Retrenchment Compensation Leave Travel Allowance
Conveyance Allowance for performing official duties Entertainment Allowance: Rs.5,000
Tour & Transfer Allowance NPS Contribution: Rs. 50,000
Transport Allowance to handicapped employees for commuting home to office and back Professional Tax
Daily Allowances incurred by employee on account of absence from his normal place of duty Family Pension Deduction: Rs.15,000
Leave encashment on retirement Income of a Minor Child: Rs.1,500
Commutation of Pension Food & Beverage Exemption
Amount received by a member of HUF from the income of family estate. Medical Insurance Premium: Rs. 25,000 (Rs. 50,000 for parents and senior citizens)
Gratuity Saving bank Interest: Rs. 10,000 u/s 80TTA
Interest Income (for senior citizens): Rs. 50,000 u/s 80TTB
Interest on Education loan
Disability of self or independent: Rs.75,000 to Rs.1,25,000 depending on disability
Treatment of self or dependent for specified disease: Rs. 40,000 and Rs. 1,00,000 for senior citizens
Donations to specified entities: 50-100% of the amount donated

In addition to above, Set-Off of losses of the following shall not be allowed if new tax regime is adopted:

– Carried forward losses or un absorbed additional depreciation, if any of the previous years.

– Loss under the head “Income from House Property” against any other head of income. (including PGBP)

Periodicity of Claim

Particulars Assessee engaged in Business/Profession Assessee not engaged in Business/Profession
Option to opt for new regime available year on year No Yes
Withdrawl of option to opt for new regime Allowed only once. Thereafter, the option is not allowed to readopted. Allowed on a year to year basis

Tax Comparison Old Regime vs New Regime:

 

 

Gross Salary

 

 

Deductions

 

 

 

Net Income

Tax Payable under Old Regime (incl Cess) Tax Payable under New Regime (incl Cess)  

Savings/(extra outflow)

5,00,000 1,50,000 3,50,000 NIL NIL NIL
7,50,000 1,50,000 6,00,000 33,800 39,000 (5,200)
10,00,000 1,50,000 8,50,000 85,800 78,000 7,800
15,00,000 1,50,000 13,50,000 2,26,200 1,95,000 31,200
20,00,000 1,50,000 18,50,000 3,82,200 3,51,000 31,200

Both systems have their own sets of pros and cons. The old system has many exemptions and deductions which helped in inculcating a good habit of investing. On the other hand, the new system gives people more flexibility and tries to simplify the process with reduced tax rates. If you are someone who is claiming a lot of deductions under the old tax regime, you may stick to the old system but if you weren’t making any tax saving investments or claiming deductions earlier too, then maybe the new system may prove to be beneficial. Therefore, any taxpayer who is looking for flexibility in investment choices and does not want to invest in eligible instruments may consider opting for new tax regime.

Hence, the taxpayer should do a detailed financial analysis and choose the best option applicable and exercise the same.

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About Shubhi Khandelwal

Shubhi Khandelwal
Shubhi Khandelwal, is a practicing Chartered Accountant, running her own venture in the name of M/s Shubhi Khandelwal and Associates. Along with her post graduation degree in commerce, she has completed Certificate Course in CSR from ICSI and in GST from Amity University. Apart from work, she is a travel enthusiast, loves reading novels and listening music. She can be reached at [email protected]

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