Wealth  Management  Services

Old Tax Regime versus New Tax Regime

August 20, 2020

FM Nirmala Sitharaman has introduced an interesting change in the Income Tax Act with Finance Act 2020. She started her speech mentioning that the Indian Tax Laws are a bit too complex to understand and she will be taking the initiative to help simplify the same.

Post this short introduction she began explaining the new tax regime effective from FY 2020-21 onwards, but the interesting “simplification” is that although new tax system is very different from the old tax system, both tax systems will be continued. So, now there is an extra confusion for the individual to decide on which scheme should he/she go for, whether to adopt new tax scheme or to stay back in the old tax scheme.

Let us try to help you make that decision by explaining the differentials of the 2 schemes. We’ll first give the entire data followed by our opinion.

So firstly, let’s look at the differentiation of tax rates between the old and the new tax scheme in the table below: -

INCOME SLABSOLD REGIME TAX RATESNEW REGIME TAX RATESNEW SYSTEM MAX. TAX BENEFITS
Up to ₹2,50,0000%0%₹0
₹2,50,000 to ₹5,00,0005%0% or 5%₹0 or ₹12,500
₹5,00,000 to ₹7,50,00020%10%₹25,000
₹7,50,000 to ₹10,00,00020%15%₹12,500
₹10,00,000 to ₹12,50,00030%20%₹25,000
₹12,50,000 to ₹15,00,00030%25%₹12,500
Above ₹15,00,00030%30%₹0
TOTAL₹75,000

In the above table you can see the Income slabs, the new tax rate, the new tax rates and the maximum benefit that you avail from new tax system.

  • For the people belonging to the income slab of ₹ 0 to ₹ 2,50,000, there is no tax applicability whether you opt for the new tax system or the new tax system. So, an income up to Rs. 2,50,000/- is Tax Free.
  • For the people belonging to the income slab of ₹ 2,50,000 to ₹ 5,00,000, the tax rate will remain same under both the schemes due to the rebate under Section 87A. So,
    • If your income is up to ₹ 5,00,000 your income will be tax free i.e. 0% tax.
    • If your income is more than ₹ 5,00,000, you’ll have to pay 5% tax.

Rebate under 87A (Limited up to ₹ 12,500) can be claimed only if the following conditions are satisfied:

  1. You are a resident individual
  2. Your total income after reducing the deductions under chapter VI-A (Section 80C, 80E etc.) does not exceed ₹ 5,00,000 in a Financial Year.

So, if your total tax payable is less than Rs 12,500, then you will not have to pay any taxes. However, this rebate will be applied to the total tax before adding the health and education cess of 4%.

  • For the people belonging to the income slab of ₹ 5,00,000 to ₹ 10,00,000, under old tax regime tax rate was flat 20% but in the new regime the tax rates have been broken into two parts,
    • If your income is in between ₹ 5,00,000 to ₹ 7,50,000, you'll have to pay tax @ 10%
    • If your income is in between ₹ 7,50,000 to ₹ 10,00,000, you’ll have to pay tax @ 15%
  • For the people belonging to the income slab of ₹ 10,00,000 and above, in the old tax regime tax rate was flat @30% but in the new regime it has been broken into 3 parts,
    • If your income is in between ₹ 10,00,000 to ₹ 12,50,000, you’ll have to pay tax @ 20%.
    • If your income is in between ₹ 12,50,000 to ₹ 15,00,000, you’ll have to pay tax @ 25%.
    • If your income is above ₹ 15,00,000, you’ll have to pay tax @30%

In old scheme we use to calculate tax by deducting Some deduction (like HRA, LTA, Professional tax, Entertainment allowance, Deduction u/s 80C to 80U) from our Gross total income and the balance (i.e. Total taxable income) on which tax is calculated but know in the new tax system government in this new tax regime has switched the system and say tax can be calculated on the gross total income provided on fulfillment on some condition listed below –

  • To avail the new tax system the government of India has introduced the new section 115 (BAC), in which any individual and HUF can go for such scheme provided that they don’t claim the listed exemptions and deductions –
1Section 80CPPF, EPF, SSY, NSC, LIP, Housing loan repayment, SCSS, Tax Savers FD’s etc.
2Section 80CCD/Section CCD (1B)Contribution to National Pension System (NPS).
3Section 80DHealth Insurance Premium + Preventive Checkups
4Section 80DD/ Section 80DDBMedical expenditure for dependents
5Section 80EInterest on Education Loan
6Section 80GDonations to Charitable Trusts
7Section 80GGADonations to Scientific Research
8Section 80GGCDonations to Political Parties
9Section 80TTADeduction on interest on saving other than Senior Citizens
10Section 80TTBDeduction for interest for Senior Citizen
11Section 80UDeduction for medical expenses for own disability

Now the question arises which scheme should we opt for and which is more beneficial for us?

A very simple explanation which works in ALL the above cases is:

  • Higher the deduction and exemption you are claiming there are more chances that the old scheme is beneficial for you.
  • Lower the deduction and exemption you are claiming higher are the chances that the new scheme will be beneficial for you.

So, lets’ take an example to understand better –

EXAMPLE - 1

PARTICULARSREFERENCESAS PER OLD TAX REGIME (WITHOUT CESS) (1)AS PER NEW TAX REGIME (WITHOUT CESS) (2)
Gross total incomeA₹ 10,00,000₹ 10,00,000
Less: DeductionB(₹ 50,000)NIL
Net Taxable incomeC = A – B₹ 9,50,000₹ 10,00,000
Tax payableD₹ 1,06,600₹ 78,000
DifferenceE= D (1) – D (2) ₹ 28,600

In the above example there is an income of ₹ 10,00,000 and no other deduction apart from ₹50,000 which is standard deduction under the head salary.

  • If we go under old taxation scheme there will be a tax payable of ₹ 1,06,000 with the deduction of ₹ 50,000.
  • If we go under new taxation scheme there will be a tax payable of ₹ 78,000 without any deduction of ₹ 50,000.

Therefore, in the above example there is a benefit of ₹ 28,600 if New Taxation scheme is adopted.

In this example no exemptions and deductions have been claimed rather than standard deduction of salary. Lets’ take another example in which Exemption and deduction have been claimed –

EXAMPLE 2:

PARTICULARSREFERENCESAS PER OLD TAX REGIME (1)AS PER NEW TAX REGIME (2)
Gross total incomeA₹ 18,00,000₹ 18,00,000
Less: DeductionB(₹ 5,00,000)NIL
Net Taxable incomeC = A – B₹ 13,00,000₹ 18,00,000
Tax payableD₹ 2,10,600₹ 2,28,600
DifferenceE= D (1) – D (2)₹78,000 

In the above example there is an income of ₹ 18,00,000 which comprises of salary and other source and suppose claims LTA ₹ 40,000, home loan interest of ₹ 2,00,000, Deduction u/s 80C ₹ 1,50,000, contributed ₹ 50,000 towards NPS, deduction u/s 80TTA ₹ 10,000 and standard deduction of ₹ 50,000 under the head salary.

  • If we go under old taxation scheme there will be a tax payable of ₹ 2,10,600 after claiming all these exemption and deduction of ₹ 5,00,000.
  • If we go under new taxation scheme there will be a tax payable of ₹ 2,88,600 without any deduction.

Therefore, in the above example there is a benefit of ₹ 78,000 if Old Taxation scheme is adopted because of several tax saving investments made.

Now, a question arises that,

Q) Can we switch between the 2 schemes in the same financial year?

The answer to this question depends upon the head in which you earn your income in. According to the explanatory memorandum to the Finance Bill, taxpayers having business income are not eligible to choose between the existing tax regime and new tax regime every year. This would mean that salaried individuals and pensioners would be eligible to switch between new tax regime and old tax regime as per their convenience every year provided, they don't have business income.

Thankfully CBDT has later clarified that an employee, having income other than the income under the head ‘Profit and Gains of Business or Profession’ and intending to opt for the concessional rate under section 115 BAC of the Act, may intimate the employer, of such intention for each previous year and upon such intimation, the employer shall compute his total income, and deduct TDS accordingly.

However, the option at the time of filing of ITR return of income under sub-section (1) of section 139 of the Act could be different from the intimation made by such employee to the employer. This means, one may inform the employer about the option – New Tax Regime or Old Tax Regime – and still choose to file ITR no matter what option has been provided to the employer. Effectively, you can switch between new and old tax regime at the time of filing ITR.

What if someone has business income, opts for the new tax regime but wants to go back?

In case an individual with business income wants to switch back to the old tax regime which has tax-exemptions and deductions, then he/she has the option to do it but only once in a a lifetime. Thus, once the above-mentioned individual has switched back to the old tax regime, then he/she cannot switch back to the new tax regime again. However, once this option of reverting back to the old tax regime is exercised, then the individual in future years cannot opt for the new tax regime again

What if someone’s business income ceases to exist in future years?


If an individual's business income ceases to exist in the future years, then they have an option to switch back again to the new tax regime as per his/her convenience every year or the or they can continue with old tax regime as well. Hence, once the individual ceases to have business income, the right to opt between the existing tax regime and new tax regime in every financial year is activated.

~PANKAJ INANI


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