The finance minister Nirmala Sitharaman announced the new tax regime in the Budget, applicable from 1 April 2021. There are more slabs and lower tax rates in the new tax regime, as demanded by taxpayers. The new tax regime is available to all individuals and HUFs, but it is optional i.e., the taxpayers have an option to opt for one, between the old tax regime and the new tax regime. On one side, there are more slabs with low rates in the new tax regime, but on the other side, all the deductions and exemptions which were available under old tax regime have been removed from the new one. That is the only difference between old and new tax regimes.
Though all the factors are acting together, the taxpayers are however left wondering which option they should go with. This article aims to figure out for the taxpayers, which option is beneficial for them, and put their minds at ease.
| Comparison between old and new tax slabs | ||
| Tax Slabs | Old Tax Rates | New Tax Rates |
| Below 250000 | 0% | 0% |
| 250000-500000 | 5% | 5% |
| 500000-750000 | 20% | 10% |
| 750000-1000000 | 20% | 15% |
| 1000000-1250000 | 30% | 20% |
| 1250000-1500000 | 30% | 25% |
| 1500000 & Above | 30% | 30% |
As one can see from the tax slab table, under the new tax regime income bracket between ₹ 500000-750000 would be taxed at 10% while income bracket between ₹ 750000-1000000 would be taxed at 15%. However, under the existing tax regimen is flat 20% on this income range. Earlier, with income above ₹ 1000000, the taxpayers paid tax @30%, that has now been broken into three parts- with rates of 20% for income bracket between ₹ 1000000-1250000, 25% for income bracket between ₹ 1250000-1500000, and then 30% for income above ₹ 1500000.
It seems very interesting that now taxpayers would have to pay tax with lower rates, but then why is there an option to choose between old and new tax regimes? The option is available because either the tax rates are high in old system but there are a number of ways that reduce a person’s tax liability. Through the addition of clauses to the Income Tax Act 1961, over the years the government has given many exemptions and deductions through which taxpayers bring down their taxable income hence, they pay less tax.
Exemptions like House Rent Allowance (HRA) u/s 10(13A), Leave Concession u/s 10(5), Leave Encashment u/s 10(10AA), Standard Deduction u/s 16(a) and many more are deducted from salary which lowers taxpayer’s Gross Total Income. Deductions u/s 80C to 80U like Public Provident Fund (PPF), Life Insurance Premium, Principal and Interest component of Home Loan, Saving Account Interest etc. are helping taxpayers to lower their taxable income by investing. It can be said that taxpayers may find their ways to optimize their salary, saving and investments because these exemptions and deductions collectively can bring down taxpayers taxable income to a minimum level. But, all exemptions and deductions are removed under the new tax regime. So, which option is best for taxpayers, you ask? Well, here's a couple of solutions to this Question.
Situation 1: Let’s take an example that X is an employee in a financial institution, who is availing few major exemptions and deductions then which option is best to him? Details given below:
| Comparison of Taxable Income between Old and New Tax Regime | ||
|
| Old Tax Regime | New Tax Regime |
| I) Annual Income | 900000 | 900000 |
| less: a)Standard Deduction | -50000 | NA |
| b) HRA | -30000 | NA |
| c) PPF | -21000 | NA |
| d) Leave Travel Allowance | -25000 | NA |
| e) Food & Meal Coupons (2000*12) | -24000 | NA |
| II)Total Exemption & Deduction (a-e) | 150000 | NA |
| Net Taxable Income (I-II) | 750000 | 900000 |
| Comparison of Tax Payable between Old and New Tax Regime | ||||
| Tax Slabs | Old Tax Regime | New Tax Regime | ||
|
| % | ₹ | % | ₹ |
| Below 250000 | 0% | 0 | 0% | 0 |
| 250000-500000 | 5% | 12500 | 5% | 12500 |
| 500000-750000 | 20% | 50000 | 10% | 25000 |
| 750000-1000000 | 20% | – | 15% | 22500 |
| 1000000-1250000 | 30% | – | 20% | – |
| 1250000-1500000 | 30% | – | 25% | – |
| 1500000 & Above | 30% | – | 30% | – |
| Total Tax |
| 62500 | Total Tax | 60000 |
| Add: Cess (4%) |
| 2500 | Add: Cess (4%) | 2400 |
| Total Tax Payable |
| 65000 | Total Tax Payable | 62400 |
From the above tables one can see that X has to pay less tax under new tax regime. One can say that X can save ₹ 2600 tax under new tax regime if he opt it.
Situation 2: Now suppose X is claiming all major exemptions and deductions then which option is best to him? Details given below:
| Taxable Income Comparison between Old and New Tax Regime | ||
|
| Old Tax Regime | New Tax Regime |
| I) Annual Income | 1800000 | 1800000 |
| less: a)Standard Deduction | -50000 | NA |
| b) HRA | -50000 | NA |
| c) Health Isurance | -25000 | NA |
| d) Leave Travel Allowance | -25000 | NA |
| e) NPS | -30000 | NA |
| f) PPF | -150000 |
|
| II)Total Exemption & Deduction (a-f) | 330000 | NA |
| Net Taxable Income (I-II) | 1470000 | 1800000 |
| Comparison of Tax Payable between Old and New Tax Regime | ||||
| Tax Slabs | Old Tax Regime | New Tax Regime | ||
|
| % | ₹ | % | ₹ |
| Below 250000 | 0% | 0 | 0% | 0 |
| 250000-500000 | 5% | 12500 | 5% | 12500 |
| 500000-750000 | 20% | 50000 | 10% | 25000 |
| 750000-1000000 | 20% | 50000 | 15% | 37500 |
| 1000000-1250000 | 30% | 75000 | 20% | 50000 |
| 1250000-1500000 | 30% | 66000 | 25% | 62500 |
| 1500000 & Above | 30% | – | 30% | 90000 |
| Total Tax |
| 253500 | Total Tax | 277500 |
| Add: Cess (4%) |
| 10140 | Add: Cess (4%) | 11100 |
| Total Tax Payable |
| 263640 | Total Tax Payable | 288600 |
From the details mentioned in the above tables, X can pay less tax in old tax regime and he can save tax by ₹24960. Now the scenario is very much clarified that if a taxpayer is claiming few exemptions and deductions then he/she should choose the New Tax Regime, but if a taxpayer is claiming all major exemptions and deductions then he/she could go for Old Tax Regime.
One more thing that a taxpayer has to take attention is that whether he/she choose the old or new tax regime may save their taxes but doesn’t decide their investments. Taxpayers should invest and get insurance for securing their & their family’s future not just for the sake of taking tax benefits.
The intentions of the policymakers behind the introduction of the new tax regime, is for the benefits of taxpayers, as to achieve an increase in investment and to simplify and rationalize the tax structure in India.
(The author is an Assistant Professor at Satyawati College (E), University of Delhi, Delhi)
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