New Tax Regime or Old Tax Regime

June 5,2020

Time to Choose Your Pick: New Tax Regime or Old Tax Regime?

It is again the time of the year when you have to submit your investment details to your employer. This year, you will have to choose between the old tax regime or the new tax structure. Whatever tax structure you adopt, it will be effective for the entire financial year.

Here’s how the old and new tax regime compare against each other:

Tax Slab(in Rs.)	Tax rate under the old regime	Tax rate under the new tax regime
0-Rs.2.5 lakhs	0%	0%
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.12.50 lakhs	30%	20%
Rs.12.50 lakhs to Rs.15 lakhs	30%	25%
Rs.15 lakhs and above	30%	30%

Finance Minister Nirmala Sitharamanin her budget speech of 2020 announced a new tax regime with more tax slabs and lower tax rates on income up to Rs.15 lakhs. However, tax payers can’t avail tax benefits such as the standard deduction of Rs.50,000, deductions under section 80C and 80D, concessions on the interest paid on home loan or rent under the new tax regime.

Advantages of the new tax regime:

Reduced tax rates and easy tax filing: When compared to the old tax system, the tax rate on the new tax regime is lower. Moreover, as exemptions are not available in this system, tax filing will be easier.

More money in hands:With the reduced tax rate, individuals can have more disposable income in their hands.

Invest in investment options in their choice: Most of the tax saving instruments have lock-in period. Many tax payers may not be comfortable in investing in these investment options due to the lock-in period or other reasons. With the new tax structure, individuals can invest in investment options of their choice.

Drawbacks of the new tax regime:

Under the new tax structure, individuals can’t avail any tax deductions under various sections. Some of the popular tax saving avenues such as investments available under section 80C and 80D, house rent, interest on home loan, leave travel concession etc. can’t be availed. The Ministry of Finance has removed around 70 exemptions out of the 120 exemptions.

Whether to choose the old tax regime or new tax regime

If you are looking for a simple answer to this question, then we hate to share the fact that there is one line answer to that question. You can arrive the right tax structure after calculating how much tax you are able to saving through both the tax structures.

To figure out the best tax structure, calculate the exemptions that you are availing and the deductions that you claim. Rent on house, travel leave allowance, food bills and phone bills might be some of the exemptions that you are currently availing. If you are salaried employee, you automatically get a tax exemption of Rs.50,000 and EPF contribution. Also, calculate the deductions that you claim against your home loan, education loan and other investments.

Now, calculate the taxable income by adding the exemptions and deductions and subtracting it from your salary. This can help you to figure out the favourable tax regime.

Let us understand it with the help of two examples. Let us consider two tax payers with an annual income of Rs.7.5 lakhs and annual income of up to Rs.10 lakhs respectively. For ease, we take that the individuals have invested the maximum amount under various heads.

Annual income of Rs.7.5 lakhs

Let us first calculate the tax payable without any exemptions and compare the old tax and new structure.

	Old Tax structure		New Tax structure
Income tax slab	Tax Rate	Tax(in Rs.)	Tax Rate	Tax(in Rs.)
Up to Rs.2.5 lakhs	0	0	0	0
Up to Rs.5 lakhs	5%	12500	5%	12500
Up to Rs.7.5 lakhs	20%	50000	10%	25000
Total		62500		37500
Health and education cess	4%	2500	4%	1500
Tax payable		65000		39000

We see that new tax structure is favourable without any tax exemptions.

Now, let us assume that the tax payer uses different benefits.

Annual Income with Tax Exemptions
Annual Income	7,50,000
Exemptions under 80C	1,50,000
80CCD(1B)	50000
80D	50000
HRA	10000
Taxable income	490000

In this case, as the taxable income is below Rs.5 lakhs, the person does not have to pay any tax. So, we see that when the individual uses the different tax saving options, the tax payer does not have to pay any tax.

Annual income of Rs.10 lakhs

	Old Tax structure		New Tax structure
Income tax slab	Tax Rate	Tax(in Rs.)	Tax Rate	Tax(in Rs.)
Up to Rs.2.5 lakhs	0	0	0	0
Up to Rs.5 lakhs	5%	12500	5%	12500
Up to Rs.7.5 lakhs	20%	50000	10%	25000
Up to Rs.10 lakhs	20%	50000	15%	37500
Total		112500		75000
Health and education cess	4%	4500	4%	3000
Tax payable		117000		78000

Here we see that new tax regime results in lesser taxes.

Let us see the impact on taxable income if we consider deductions.

Taxable Income with Tax Exemptions
Annual Income	10,00,000
Exemptions under 80C	1,50,000
80CCD(1B)	50000
80D	50000
HRA	10000
Taxable income	740000

In this case, the taxable income falls below Rs.7.5 lakhs.

Now, let us compare the old tax structure with exemptions and the new tax structure.

	Old Tax structure		New Tax structure
Income tax slab	Tax Rate	Tax(in Rs.)	Tax Rate	Tax(in Rs.)
Up to Rs.2.5 lakhs	0	0	0	0
Up to Rs.5 lakhs	5%	12500	5%	12500
Up to Rs.7.5 lakhs	20%	50000	10%	25000
Up to Rs.10 lakhs		0	15%	37500
Total		62500		75000
Health and education cess	4%	2500	4%	3000
Tax payable		65000		78000

We see that the tax payer has to pay less tax if the old tax structure with exemptions is opted.

Conclusion:While many investment options offer tax benefits, tax planning should be the main focus while taking any investment decisions. Finding out the best tax regime will depend on various factors such as tax slab, deductions and exemptions availed and investment options. So, talk to your CA or financial advisor to figure out the best tax regime.