In the new budget for the financial year 2020-21, Finance Minister Nirmala Sitharaman introduced a new tax regime for taxpayers in India. The finance minister mentioned in her budget speech that the current Income Tax Act, 1961 is full of several exemptions and deductions that make compliance complicated and a hectic process for taxpayers.
Though the removal of many tax deductions and exemptions would make the compliance less time-consuming, those who have maintained their financial portfolio to avail certain tax benefits as per the old tax regime may have to pay more tax under the new tax slabs if they opt for it depending on their income.
The new budget tries to puts more money in the hands of taxpayers. However, individuals and HUFs are given an opportunity to select between the old and the new tax regime.
As per the old tax regime, the income tax slab was nil for people with annual income up to Rs. 2.5 lakhs, 5% tax rate for people with annual income between 2.5 lakhs to 5 lakhs, 20% for income group between Rs. 5 lakhs to Rs. 10 lakhs and 30% for income group of 10 lakhs and above.
As per the new income tax regime, the income group between Rs. 2.5 lakhs to Rs. 5 Lakhs will pay 5% income tax, income group of Rs. 5 lakhs to Rs. 7.5 lakhs would be needed to pay income tax at the rate of 10%. The income group ranging from Rs. 7.5 lakhs to Rs. 10 lakhs will be required to pay income tax at the rate of 15%. And those falling in the income group ranging between Rs. 10 lakhs to 12.5 lakhs and Rs. 12.5 lakhs to Rs. 15 lakhs will be levied income tax at the rate of 20% and 25%, respectively. As compared to the old tax regime, the new tax regime for high-income earners is likely to make taxpayers pay a higher amount in the long run.
While in the old tax regime, the taxpayers benefited from various tax exemptions and deductions on the life insurance and ELSS investments and many others under Section 80C, the new tax regime does not offer exemptions like the old one. Simply put, if you are a salaried taxpayer, you will have to let go of the almost all available deductions under the old income tax regime specified under chapter VI-A, such as HRA, investments under Section 80C, health insurance premium, etc. However, there are no charges in the surcharge. Those will remain the same as per the old tax regime.
Tax exemption is given to individuals earning up to Rs. 5 lakhs remain the same. Refer the old and new tax rates as applicable on annual income:
| Annual income | Old tax rate | New tax rate |
|---|---|---|
| Up to Rs. 2.5 lakhs | Nil | Nil |
| Rs. 2.5 lakhs to Rs. 5 lakhs | 5% | 5% |
| Rs. 5 lakhs to Rs. 7.5 lakhs | 20% | 10% |
| Rs. 7.5 lakhs to Rs. 10 lakhs | 20% | 15% |
| Rs. 10 lakhs to Rs. 12.5 lakhs | 30% | 20% |
| Rs. 12.5 lakhs to Rs. 15 lakhs | 30% | 25% |
| Rs. 15 lakhs and above | 30% | 30% |
Things to consider:
Let’s understand how the income group of Rs. 15 lakhs will be charged under the old and the new regime.
| The old regime with deductions | Old regime without deductions | New regime | |
|---|---|---|---|
| Income | Rs. 15 lakhs | Rs. 15 lakhs | Rs. 15 lakhs |
| Exemptions/deductions | Rs. 2 lakhs (Rs. 1.5 lakh under Section 80 + Rs. 50,000 standard deduction) | Nil | Nil |
| Taxable income | Rs. 13 lakhs | Rs. 15 lakhs | Rs. 15 lakhs |
| Total income tax | Rs. 202,500 | Rs. 262,500 | Rs. 187,500 |
| The old regime with deductions | Old regime without deductions | New regime | |
|---|---|---|---|
| Income | Rs. 30 lakhs | Rs. 30 lakhs | Rs. 30 lakhs |
| Exemptions/deductions | Rs. 4,25000 | Nil | Nil |
| Taxable income | Rs. 25,75,000 | Rs. 30,00,000 | Rs. 30,00,000 |
| Total income tax | Rs. 5,85,000 | Rs. 712,500 | Rs. 637,500 |
The above tax payable would include 5% cess. The above calculation is for reference purposes only.
Applicable deductions: Rs. 1.5 lakhs under Section 80C, Rs. 50,000 standard deduction, Rs. 25,000 under Section 80D, Rs. 2 lakhs home loan interest under Section 24.
| The old regime with deductions | Old regime without deductions | New regime | |
|---|---|---|---|
| Income | Rs. 60 lakhs | Rs. 60 lakhs | Rs. 60 lakhs |
| Exemptions/deductions | Rs. 4,25000 | Nil | Nil |
| Taxable income | Rs. 55,75,000 | Rs. 60,00,000 | Rs. 60,00,000 |
| Total income tax | Rs. 16,33,500 | Rs. 17,73,750 | Rs. 16,91,250 |
Applicable deductions: Rs. 1.5 lakhs under Section 80C, Rs. 50,000 standard deduction, Rs. 25,000 under Section 80D, Rs. 2 lakhs home loan interest under Section 24.
Considering the new tax regime wherein many deductions and exemptions would not be applicable in case a taxpayer opts for a concessional new tax regime, the taxpayer should evaluate both the tax regimes. Any individual taxpayer who is looking for flexibility in the investment options and does not want to invest in certain eligible instruments may consider opting for the new income tax regime. However, it is always advisable to compare and make a decision wisely.
It is important to note that individuals (except those who have income from profession or business) can choose the preferred option every year. Individuals who have income from business cannot switch between the old and new income tax regime every year. In case they opt for a new tax regime, such individuals get only a single chance to go back to the old regime. Further, once switched back to the old tax regime, they cannot opt for the new income tax regime unless their business income ceases to exist.
