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:
|Tax Payable under Old Regime (incl Cess)||Tax Payable under New Regime (incl Cess)||
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.