Income Tax Return: Settling The Old vs New Tax Regime debate

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A taxpayer has to forego 70 tax exemptions and standard deductions in new income tax regime.

Finance Minister Nirmala Sitharaman announced a new simplified tax regime for personal taxpayers. The rates under the new tax regime have the option for HUFs to pay their taxes as per the new rules with no exemptions and reduced tax rates. The new tax rates proposed by the Ministry of Finance are aimed at boosting the Indian economy.

It is all upon the taxpayers as to which option they want to opt for according to their needs and income. New tax rates will keep you away from tax crunch but for the longer term you may end up paying high rates. Whereas, the old tax regime can give you investment options but a cash crunch. It totally depends on taxpayers and the exemption and deduction which they want to avail or not under different slab rates and options.

According to financial industry expert Hemant Sood, Managing Director, Findoc Financial Services Group: “The tax rates have been reduced but with the new tax rates one cannot avail around 70 tax exemptions and deductions out of more than 100 which were earlier can be availed. So, basically, one has to forego all of these. However, it depends upon person to person which tax rates are beneficial to go ahead with.”

Income Tax Slab for New FY 2020-21	New Tax Rate	Old Tax Rate
Upto Rs 2.5 Lakhs	NIL	NIL
Rs 2.5- Rs 5 Lakhs	5%	5%
Rs 5- Rs 7.5 Lakhs	10%	20%
Rs 7.5 -Rs 10 Lakhs	15%	20%
Rs 10 - Rs 12.5 Lakhs	20%	30%
Rs 12.5 - Rs 15 Lakhs	25%	30%
Above Rs 15 Lakhs	30%	30%

Whereas, CA Gopal Kumar Kedia says- “In this Budget, Government gave the option to Individuals to opt either exemption and deductions free taxation system or otherwise, whichever is more beneficial to them. In my opinion, the new regime of taxation is more beneficial to Individuals and to the government too. Individuals will have more liquidity in their hand in the new regime of taxation and corruption and bribery will be eliminated.”

The difference between New and Old income tax regime:

If an individual wish to avail the new tax rates as announced by Budget 2020, he/ she will not be eligible to claim the following tax benefits:

Leave travel concession as contained in clause (5) of section 10
House rent allowance as contained in clause (13A) of section 10
The allowances as contained in clause (14) of section 10
Standard deduction of Rs. 50,000 u/s 16
Employment/professional tax deduction as contained in section 16
Interest under section 24 in respect of self-occupied or vacant property referred to in sub-section (2) of section 23. (Loss under the head income from house property for rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law)
Any deduction under chapter VI-A; [except 80CCD (2) - NPS Contribution by the employer

An example to understand better

Salary up to 5 lakhs: No income tax.
Salary 6 lakh: The one can invest 50 K in 80C, mediclaim, and others to get in 5 lakh range and hence have to pay no income tax. (50K will be deducted in Standard Deduction)
Salary 7 lakh: Either pay 32.5 K with new slab or invest 1.5 lakh under 80C and others to save the tax (50K will be deducted in Standard Deduction)
Salary 8 lakh: Either pay 40 K with new slab or invest 1.5 lakh under 80C and others, 50K in NPS to save the tax, (50K will be deducted in Standard Deduction). Still have to pay 22.5K for tax
Salary 9 lakh: Either pay 60 K with new slab or invest 1.5 lakh under 80C and others, 50K in NPS, (50K will be deducted in Standard Deduction), and still pay 42.5 K

“Above calculations suggest that old tax rates with exemptions and deductions are a better option for those individuals having higher income bracket,” says Sood. But for low-income brackets, if they want to save some capital with the help of investment, then the old tax regime is good for them. Else to keep cash with them the new option is better.

If an individual has a home loan, education loan, Mediclaim for family or parents, certain other deductions will be available in the later tax slab. Hence, from this year now one must calculate their total income as well as deductions and must decide whether they will invest money for a lock-in period or can get better returns after paying income tax through new slab.

It is important to note that post the announcement of new tax rates, Individual will have more cash in hand at his/her clearance at the end of every month or year which was primarily the purpose of the government to boost the consumption thereby taking India into the $5trillion GDP goal.

The other benefits of new income tax rates

• Optional for Individuals for opting old or new rates

• Lower Income earners are benefitting from new tax rates

• National Pension System (NPS) i.e. Deduction under 80CCD (2) will continue

• DDT abolished

So, before opting for any of the two options (New Tax rate and Old Tax rate) it is suggested to take the advise of your chartered accountant first and then opt the slab rates according to income and your need. Remember the exemptions that you will avail or not and keep filing your income tax timely.

EXPLAINED: Is New Income Tax slab good news for taxpayers?

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