Comparison of New Income Tax Regime vs Old Income Tax Regime

Comparison of New Income Tax Regime vs Old Income Tax Regime

With the initiation of a new Income Tax Regime comes the confusion of which one is suitable for you. You, as the taxpayer, may find it challenging to identify which one of the two regimes is better and relevant to your income.

Here another question arises, what is your income source? Are you a salaried individual running your business or an entrepreneur or professional? With alterations in existing sections, many of you are evaluating the difference between the old tax and the new tax.

Though there is no custom-fit approach for all taxpayers, through this article, we elaborate on the new tax vs old tax regimes and the best suitable way forward for your income structure. During Budget 2020, the Government rolled out a new tax regime to relieve taxpayers and streamline the income tax law. Another step is to remove the dependency of taxpayers on tax consultants and to file their returns independently.

The New Tax Regime

Let's begin with the new tax regime. It offers six tax slabs with prevailing rates reduced on income up to Rs. 15 lakh. Due to the income slabs and the various tax rates. The new tax regime has its pros and cons. 

The Pros: 

  • The current tax regime is still in place, and you as a taxpayer have the option to choose the best suitable one for you, that is, either the old tax regime or the new tax regime. The Government has not enforced compulsion to switch to the new tax regime. 
  • The new tax regime offers the flexibility to the taxpayer to invest their money as they prefer. With the new scheme, there is no obligatory requirement to invest in tax saving schemes and insurance plans that may not align with their financial goals. 
  • With multiple tax slabs, you as the taxpayer will fit into the tax slab that best meets your yearly income. 

The Cons: 
  • Gradually, the present exemptions will be reviewed and slowly erased from the new tax regime. 
  • With no exemptions, your total taxable amount will be higher as compared to the old tax regime. 
  • Though there are six tax slabs, it may not be beneficial for all taxpayers if the income-tax authorities decide entirely to do away with the old regime. 

The Exemptions & Deductions 

With the new tax regime, several exemptions and deductions have been removed. Below is a comprehensive list if you fall under the category of a salaried individual or business, or professional. 

  • Salaried individuals could claim a standard deduction of Rs 50,000. 
  • Leave Travel Allowance
  • House rent allowance depending upon salary structure and rent paid
  • Professional tax paid by a maximum of Rs. 2,500/- 
  • Deductions available under Section 80TTA and 80TTB that is interest from Savings Account/Deposits
  • Tax deduction on entertainment allowance and deduction on professional tax For government employees
  • The interest amount payable on home loan for a self-occupied or any vacant property u/s 24 maximum deductions of Rs. 2 lakh
  • Deduction of Rs 15,000 allowed from family pension under clause (ii) (a) Section 57
  • Special Allowances that are provided under Section 10(14) except:
  • Transport allowance granted to a disabled employee.
  • Conveyance allowance
  • Any allowances granted for meeting the cost of travel on tour or transfer of an employee.
  • Daily allowance
  • Perquisites
  • Business owners and professionals will lose the exemption to Special Economic Zones under Section 10AA.
  • Deductions under Section 32AD, 33AB, 33ABA, 35(1)(ii),35(1)(ii( (a), 35(1)(iii), 35(2AA), 35AD and 35CCC of the Income Tax Act.
  • Options of additional depreciation under Section 32(ii) (a) of the Income Tax Act
  • The option to carry forward or unabsorbed depreciation of earlier years
  • Tax-saving investment deductions under Income Tax Act , Chapter VI-A 80C, 80D, 80E, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc. These tax-saving investment options include ELSS, NPS, PPF tax relief on mediclaim insurance premium, FDR, dependents who are differently-abled, expenses for specified medical treatments, interest on education loan and many more. 

Exemptions that remain prevalent in the new system that you can claim: 

  • Interest received on Post Office Savings Account under Section 10(15)(i) the maximum amount of Rs. 3,500. 
  • Gratuity received from employer up to a maximum amount of Rs. 20 Lacs.
  • Amount received from Life Insurance Policy on maturity under Section 10(10D).
  • Employer contribution in NPS or EPF up to 12% of salary and interest on EPF up to 9.5% p.a. 
  • Income from Life Insurance.
  • Income from agricultural farming.
  • Standard reduction on rent. 
  • Retrenchment compensation.
  • Leave encashment on retirement.
  • VRS proceeds up to Rs 5 lacs.
  • Retirement cum death benefit. 
  • Money received as a scholarship for education. 
  • Interest and maturity amount of PPF or Sukanya Smriddhi Yojna.
  • Commutation of Pension. The new tax regime offers you to claim deductions u/s 80CCD(2) (employers contribution in notified pension scheme) and 80JJAA (for new employment).

Old Tax vs New Tax Regime: Which one would you choose? 

IF your income is below 10 Lakhs, there is a higher chance that you will benefit from the old Tax regime, and if you earn more than 10 Lakhs annually, you must opt for a new tax regime. However, several other factors matter in this regard. But if you want us to answer you precisely to choose from one of the two options that we all have, then let me tell you vividly that there is no specific answer to this question as it depends on your financial situation and your annual earnings. Both the new income tax slab vs old tax slab have their advantages and disadvantages. It all depends on whether you are interested in claiming the deductions and exemptions with the new tax slab offering a variation of earning buckets and corresponding rates. The old tax slab offers deductions and exemptions. It is recommended to do a comparative analysis and evaluation under both the tax regimes before you file your taxes. 

Let's understand the difference with the assistance of an illustrative example as below: 

Going by the above illustration, if your yearly income is on the higher side, it is a safer bet to choose the old tax regime as compared to the new one. The new income tax slab vs old income tax slab each have their merits and demerits. With the old tax regime, the investment opportunities for the taxpayer are high due to the variation of deductions and exemptions like PPF, ELSS, Mediclaim etc. The new tax regime matches up to the new investors and those who have just commenced their careers as their income has just begun. 

Hence, whether the old tax vs the new tax regime is suitable for you will only be put to the test when you input your earnings in both the regimes to know the exact tax payable. To learn more about income tax payable by you, TAXAJ offers an Income Tax Calculator to bring to you ease of calculations.

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