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Which Is Better Old Tax Regime Or New Tax Regime?

by Sudhir kumar

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The Union Budget 2020 was presented on 1st February 2020 and Finance Minister Nirmala Sitharaman presented taxpayers with two options:

  1. Move to the new tax regime – This tax structure contains seven slabs but one cannot avail deductions under various sections from the gross total income.
  1. Stay in the old tax regime – You will continue to pay taxes at the existing rates.

The New Taxation Slab and Existing Taxation Slab are as below.

Income (In Rs.)

New Tax Regime

Old Tax Regime

Up to 5,00,000

No Tax

No Tax

5,00,000 – 7,50,000

10%

20%

7,50,000 – 10,00,000

15%

20%

10,00,000 – 12,50,000

20%

30%

12,50,000 – 15,00,000

25%

30%

Above 15,00,000

30%

30%

A point to note is that if you choose the new tax slabs, you cannot come back to the old tax system if you have business income. Those who do not have business income can switch between the two systems.

What deductions have been removed under the new tax regime? 

All deductions under Chapter VI A of the Income Tax Act, 1961 which includes:

  1. Investments made in Equity Linked Savings Schemes (ELSS)
  2. Contributions to Public Provident Fund (PPF), Life Insurance Premiums and other deductions under Section 80 C
  3. Premiums paid towards Medical Insurance under Section 80 D
  4. Education Loan under Section 80 E, Electric Vehicle Loan under Section 80 EEEB, and Home Loan Interest on affordable houses under Section 80EEA
  5. Donations made to Charitable Institutions and Political Parties under Section 80 G

Deduction on Home Loan Interest up to Rs. 2,00,000, House Rent Allowance (HRA) and Standard Deduction also cannot be claimed.

*An important point to note is that deduction under sub-section 2 of Section 80CCD which is employer contribution on behalf of an employee in Notified Pension Scheme (NPS) and Section 80JJAA which is for new employment can be claimed under new tax regime.

Will I save more tax if I move to the new slabs?

Whether or not you will be able to save more taxes if you move to the new tax regime depends entirely on your own personal situation.

Let us look at an example below:

The below table illustrates four different individuals who earn different levels of income and the tax they will have to pay under the old tax regime:

Particulars Existing Tax

Old Tax Regime

   

A

B C D
Annual Income  

6,00,000

9,00,000 12,00,000 16,00,000
Less: Standard Deduction Allowed

50,000

50,000 50,000

50,000

Less: Deduction u/s 80 C Allowed

85,000

1,50,000 1,50,000

1,50,000

Less: HRA Deduction Allowed

1,00,000

1,50,000 2,00,000

2,50,000

Gross Taxable Income   3,65,000 5,50,000 8,00,000

11,50,000

Up to Rs. 2,50,000

Nil 0 0 0

0

2,50,000 – 5,00,000

5% 0 12,500 12,500

12,500

5,00,000 to 7,50,000

20%   10,000 50,000

50,000

7,50,000 to 10,00,000

20%     10,000

50,000

10,00,000 to 12,50,000

30%      

45,000

12,50,000 to 15,00,000

30%      

 

Above 15,00,000

30%      

 

Tax to be Paid   0 22,500 72,500

1,57,500

The below table illustrates four different individuals who earn different levels of income and the tax they will have to pay under the new tax regime:

Particulars

Alternate Tax New Tax Regime
 

 

A B C D
Annual Income   6,00,000 9,00,000 12,00,000

16,00,000

Less: Standard Deduction

Not Allowed 0 0 0 0
Less: Deduction u/s 80 C Not Allowed 0 0 0

0

Less: HRA Deduction

Not Allowed 0 0 0 0
Gross Taxable Income   6,00,000 9,00,000 12,00,000

16,00,000

Up to Rs. 2,50,000

Nil 0 0 0 0
2,50,000 – 5,00,000 5% 12,500 12,500 12,500

12,500

5,00,000 to 7,50,000

10% 10,000 25,000 25,000

25,000

7,50,000 to 10,00,000

15%   22,500 37,500

37,500

10,00,000 to 12,50,000

20%     40,000 50,000
12,50,000 to 15,00,000 25%      

62,500

Above 15,00,000 30%      

30,000

Tax to be Paid   22,500 60,000 1,15,000

2,17,500

*The above tables are for illustrative purposes only

**Please note the tax to be paid does not take into consideration Health and Education Cess of 4%.

At the most basic level, a large number of taxpayers will have investments under Section 80 C and will claim HRA. They will also have the standard deduction of Rs. 50,000 across all tax slabs.

From the above tables, we can see that the existing tax system proves to be more beneficial than the alternative tax system in the given scenarios.

To know more about which tax slab is most beneficial for you, schedule a call with one of our SEBI registered Investment advisors.

Happy Investing!

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