Old vs New Income Tax Regime- An answer everyone is looking for!

CA Rachit Agarwal
CA Rachit Agarwal

Budget 2020 has given taxpayers two options i.e. they can continue to pay tax in an existing tax regime (availing benefits of tax exemptions and deductions) or switch over to a new tax regime of lower tax rates by forgoing some tax exemptions and deductions.

The new tax regime is different from the existing system in two aspects: –

  • One, the tax slabs have increased, accompanied by the lowering of rates in the sub-Rs 15 lakh range. Here is a comparison between the old and new tax slabs.

Tax Slab on income of Rs.

Old Tax Rates (%)

New Tax Rates (%)

0-2,50,000

0

0

2,50,001-5,00,000

5

5

5,00,001-7,50,000

20

10

7,50,001-10,00,000

20

15

10,00,001-12,50,000

30

20

12,50,001-15,00,000

30

25

15,00,001 and above

30

30

  • Second, around 70 exemptions and deductions that were being used by taxpayers in the existing regime won’t be available in the new regime, some of which are Standard deduction of Rs 50,000, House rent allowance, Housing loan interest, Investments under Sec 80C, Leave travel allowance, NPS contribution, Mediclaim, etc. while some 50 tax exemptions have been left untouched in the new regime like standard deduction on rent: 30% of the rent received, Agricultural income, Income from life insurance, etc.

Also, taxpayers having business income are not eligible to choose between the existing tax regime and new tax regime every year i.e. they can do so only once during their lifetime. However, taxpayers having no income under “Business head” can switch from old to new regime or vice versa as many times as they want. If the individual’s business income ceases to exist in future years then they have an option to switch back again to the new tax regime as per his/her convenience every year or they can continue with the old tax regime as well. 

Finance Minister Nirmala Sitharaman said in her budget speech that a taxpayer earning Rs 15 lakh will save Rs 78,000 in tax under the new regime. However, this assumes that the taxpayer is not claiming any deduction at all. The Finance Ministry expects four out of five taxpayers to move to the new tax regime.

In light of the above and considering the new personal tax regime wherein certain deductions and exemptions would not be applicable in case of taxpayers opting for a concessional new tax regime, the taxpayers may evaluate both the regimes. It is quite a tricky task. Any taxpayer who is looking for flexibility in the investment choices and does not want to invest in the specified eligible instruments may consider opting for the new tax regime. However, it is advisable to do a comparative evaluation under both the regimes in advance for payment of advance tax and deduction of TDS by the employer in FY 2020-2021 according to the taxpayer’s choice.

For any professional help, kindly visit the consultancy division of ProCapitas (link is given below) or mail us at [email protected]

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