New Income Tax Slab 2020-21 | Old Vs New Tax |
!!! Which is Better !!!
The new income tax calculations were announced with the new budget on 1st February by FM Sitharaman. According to the new budget, individual taxpayers can switch back and forth between the new tax regime and the old structure. The Central Board of Direct Taxes Chairman, PC Mody says that the new tax regime offers lower slabs without exemptions. Therefore, as an individual tax payer, if you opt for the new structure, you have to forego all tax breaks under this scheme to avail the reduced tax rates. Salaried individuals can switch between the old and the new structure.
This has no doubt created confusion amongst tax payers. Some people believe that the new tax structure is only beneficial to certain tax payers whereas other say that this is creating more confusion in the computation of taxes. In this article, we will highlight and discuss in detail the new income tax guidelines for the FY 2020-21 and also do a mock calculation of taxes with both the old and the new structure to show which one is finally beneficial for you.
As a taxpayer, you have two options available:
1. New Income Tax Structure – Forego all exemptions and breaks and avail lower tax rates
2. Old Income Tax Structure – At the existing income tax rates, benefit from the exemptions and tax breaks.
| Taxable Income (Rs.) | Existing Tax Rate | New Tax Rate* |
|---|---|---|
| Up to ₹2.5 Lakh | Nil | Nil |
| ₹2.5 – ₹5 Lakh | 5% | 5% |
| ₹5 – ₹7.5 Lakh | 20% | 10% |
| ₹7.5 – ₹10 Lakh | 20% | 15% |
| ₹10 – ₹12.5 Lakh | 30% | 20% |
| ₹12.5 – ₹15 Lakh | 30% | 25% |
| ₹15 Lakh and above | 30% | 30% |
| *All exemptions and breaks have to before gone to avail these tax rates |
||
| *For tax payers below the age of 60 years |
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The old regime have just 3 applicable tax rates of 5%, 20% & 30%, as against 6 granular rates of tax under new tax regime. Under the new tax regime, concessional tax rates are proposed for taxpayer earning income up to Rs. 15 Lakh. Income above Rs. 15 Lakh is unaffected whether it’s a new tax regime or an old tax regime.
New tax regime requires taxpayers to forgo most of the exemptions & deductions and so taxpayers are in a dilemma of making the right choice. Common question is – which tax regime is better – Old tax regime with higher tax rate offering exemption & deductions or the new concessional tax rate regime without any exemptions & deductions? Let us first compare the tax liability without any deductions & exemptions on income at every peak point of income slab in case of individual & HUF taxpayer (who is not a senior citizen & not salaried taxpayers):
| Income of the Individual | Tax in Old Regime* | Tax in New Regime* | Tax Saving |
|---|---|---|---|
| ₹2.5 Lakh | Nil | Nil | 0 |
| ₹5 Lakh | 13000# | 13000# | 0 |
| ₹7.5 Lakh | 65000 | 39000 | 26,000 |
| ₹10 Lakh | 1,17,000 | 78,000 | 39,000 |
| ₹12.5 Lakh | 1,95,000 | 1,30,000 | 65,000 |
| ₹15 Lakh | 2,73,000 | 1,95,000 | 78,000 |
| ₹20 Lakh | 4,29,000 | 3,51,000 | 78,000 |
(In New Income Tax regime, Tax slab rates are same for all individuals including senior citizens and Very Senior citizens).
Tax Deductions and Exemptions not allowed in the new tax structure
1. Section 80C – The most popular tax deduction under Section 80C of up to ₹1.5 Lakh is not applicable in the new tax structure. This means that any profits made from investments such as Life Insurance, PPF, School tuition fees, ELSS, PF etc. is not applicable. However, one can still claim deduction under Section 80CCD for employer contribution to the employee NPS.
2. Section 80D – Tax exemption under section 80D which allows for deduction for medical insurance premium and preventive health checkup is also not allowed.
3. LTA – Leave Travel Allowance exemption which is given to salaried individuals twice a year in a period of four years is also not allowed.
4. HRA – HRA or House Rent Allowance is a house rent limit provided by the employer to the employee for renting a house. In the old tax structure, one could claim a deduction up to a certain limit, but in the new tax structure it is not allowed.
5. Standard Deduction – A standard deduction of ₹50,000 was initially available to salaried individuals. This is not permitted in the new tax structure.
6. Section 80TTA – Section 80TTA provides an exemption of up to ₹10,000 on income generated from interest earned. This is not allowed in the new tax regime.
7. Section 80DDB – Section 80DDB provides benefits for disability up to ₹40,000. This is also not allowed in the new tax structure in case you were planning to switch over.
8. Section 80E – Section 80E allows for a tax break on the interest paid for education loans. This is also not permitted in the new structure.
9. Section 80G – Section 80G which concerns donations, says that one can claim a deduction of the equivalent amount made towards a donation. This also cannot be claimed in the new tax structure.
10. Section 24 – Section 24 for a Home Loan Interest allowed an individual to claim a tax deduction on the interest paid on a home loan up to an amount of ₹200,000. This benefit is also not available to you if you go for the new tax slabs.
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Though the new tax regime is simple to follow, yet it will be worthwhile to do the mathematics before opting for it. The million dollar question is, how should tax payers make this choice? Both regimes have their own sets of pros and cons. The choice would necessarily dependent on:
1. Income slab of every individual.
2. Extent of exemptions and deduction available with the taxpayers.
3. Alternate investments options & returns thereon if taxpayers prefer not to opt for the new regime.
4. Short term and long term financial goals of the taxpayers.
CRUX
One needs to calculate the total income tax under old as well as new regime individually. So long as the benefit of exemptions and deduction is more than impact of higher tax rate under the old tax regime, it would be advisable not to opt for the new tax regime but continue with the old tax regime. It makes sense to evaluate before taking a final call.
To be more specific, if any taxpayer have an admissible deduction & exemptions of more than Rs. 3 Lakh then it will generally be advisable for such taxpayers to remain in the old tax regime irrespective of their income slab.
Please ensure to file your income tax return as it has lots of benefits. I would soon be writing an article on it, so that you do not miss out such an important thing.
For any query, write back to us and we would be happy to help you
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