Through Finance Act 2020, CBDT has given an option to Individual and HUF taxpayer to pay income tax either under existing tax mechanism or to opt out New Tax Regime & pay tax as per New Regime. The whole purpose of bringing New Tax Regime is to provide flexibility to taxpayers so that taxpayer can manage their investments, earlier taxpayer were bound to invest to just save tax. Under new tax regime, an option to pay tax with low rate is given however certain deductions shall not be allowed, it means tax payer is not required to investment in certain tax savings scheme etc and can pay tax on the income received without considering deductions. Lets read in details about Comparison of Old Versus New Tax Regime under Income Tax Act.
Key Characteristics of New Tax Regime Announced by Finance Act 2020:
Under new tax regime, taxpayer has to forgone certain deductions and exemption which is available in existing or old tax regime. Further under new tax regime, taxpayer is liable to pay tax at six rates against just three rates of 5% 20% and 30% in existing regime. Further under new tax regime, if taxpayer is salaried employee then he has to inform their employer about which option he would like to opt and tax u/s 192 will be deducted accordingly.
Advantage for opting New Tax Regime:
To a certain class of taxpayers new tax regime is going to be beneficial. In general, new tax regime is will always be beneficial for those persons whose does not have investments in 80C, 80D, and also not claiming Exemption of HRA, Standard Deductions, Housing loan Interest (self occupied) Exemptions etc, However clear answer can be given only after considering actual income, deductions & exemptions available to such taxpayer. Following are the Key Advantages of New Tax Regime as compare to old tax regime:
- Taxpayer is not required to block their money by investing in long term Investments like investment in Life Insurance, Public Provident Fund and National Pension Scheme.
- Under New Tax Regime, tax calculation become more easy as compare to existing tax regime as certain deduction and exemptions would not be available
- Under New Tax Regime, taxpayer has more flexibility to pay income tax at various rates ranging 5% to 30%.
- Taxpayer can opt out from new tax regime at any point of time before filing of ITR
Deduction which shall be allowed in New Tax Regime:
- Standard deduction prescribed u/s 24 (a) of Income Tax Act
- Deduction prescribed u/s 24 (b) of Income Tax Act on rent out property
- Deduction relating to payment made in National Pension Scheme by Employer as prescribed u/s 80CCD
- Deduction u/s 80JJAA relating to employment of new employees (available one to business income)
Comparison of Old Tax Regime versus New Tax Regime:
To compare old and new tax regime let’s take some assumptions. Here we assumed that taxpayer is eligible for following deductions and exemptions from their gross total income:
| S.no. | Deduction/ Exemption | Amount |
| 1 | 80 C | 1,50,000 |
| 2 | 80 D | 30,000 |
| 3 | Standard Deduction from Salary | 50,000 |
| 4 | Interest on repayment of loan | 2,00,000 |
| 5 | HRA | 1,00,000 |
| Total | 5,20,000 | |
We will evaluate existing versus new tax regime with help of 3 case study at different level of income.
Case 1: Gross Total Income of taxpayer is INR 10 Lkah
Calculation of Taxable Income:
| Particular | New Tax Slab | Existing Tax Slab |
| Total Income | 10,00,000 | 10,00,000 |
| Deductions | 0 | 5,20,000 |
| Taxable Income | 10,00,000 | 4,80,000 |
Calculation of tax payable:
| Income Tax Slab for New FY 2020-21 | New Tax Slab | Existing Tax Slab | Tax payable under new tax regime | Tax payable under existing tax regime |
| Up to Rs 2,50,000 | Nil | Nil | Nil | Nil |
| Rs 2,50,000 – Rs 5,00,000 | 5% | 5% | 12,500 | – |
| Rs 5,00,000 – Rs 7,50,000 | 10% | 20% | 25,000 | – |
| Rs 7,50,000 – Rs 10,00,000 | 15% | 20% | 37,500 | |
| Rs 10,00,000 – Rs 12,50,000 | 20% | 30% | – | – |
| Rs 12,50,000 – Rs 15,00,000 | 25% | 30% | – | – |
| Above Rs 15,00,000 | 30% | 30% | – | – |
| Total Tax Payable | 75,000 | Nil | ||
Case 2: Gross Total Income of taxpayer is INR 15 Lakh
Calculation of Taxable Income:
| Particular | New Tax Slab | Existing Tax Slab |
| Total Income | 15,00,000 | 15,00,000 |
| Deductions | 0 | 5,20,000 |
| Taxable Income | 15,00,000 | 9,80,000 |
Calculation of tax payable:
| Income Tax Slab for New FY 2020-21 | New Tax Slab | Existing Tax Slab | Tax payable under new tax regime | Tax payable under existing tax regime |
| Up to Rs 2,50,000 | Nil | Nil | Nil | Nil |
| Rs 2,50,000 – Rs 5,00,000 | 5% | 5% | 12,500 | 12,500 |
| Rs 5,00,000 – Rs 7,50,000 | 10% | 20% | 25,000 | 96,000 |
| Rs 7,50,000 – Rs 10,00,000 | 15% | 20% | 37,500 | |
| Rs 10,00,000 – Rs 12,50,000 | 20% | 30% | 50,000 | – |
| Rs 12,50,000 – Rs 15,00,000 | 25% | 30% | 75,000 | – |
| Above Rs 15,00,000 | 30% | 30% | – | – |
| Total Tax Payable | 2,00,000 | 1,08,500 | ||
Case 3: Gross Total Income of taxpayer is INR 25 Lakh
Calculation of Taxable Income:
| Particular | New Tax Slab | Existing Tax Slab |
| Total Income | 25,00,000 | 25,00,000 |
| Deductions | 0 | 5,20,000 |
| Taxable Income | 25,00,000 | 19,80,000 |
Calculation of tax payable:
| Income Tax Slab for New FY 2020-21 | New Tax Slab | Existing Tax Slab | Tax payable under new tax regime | Tax payable under existing tax regime |
| Up to Rs 2,50,000 | Nil | Nil | Nil | Nil |
| Rs 2,50,000 – Rs 5,00,000 | 5% | 5% | 12,500 | 12,500 |
| Rs 5,00,000 – Rs 7,50,000 | 10% | 20% | 25,000 | 100,000 |
| Rs 7,50,000 – Rs 10,00,000 | 15% | 20% | 37,500 | |
| Rs 10,00,000 – Rs 12,50,000 | 20% | 30% | 50,000 | 2,94,000
|
| Rs 12,50,000 – Rs 15,00,000 | 25% | 30% | 75,000 | |
| Above Rs 15,00,000 | 30% | 30% | 3,00,000 | |
| Total Tax Payable | 5,00,000 | 4,06,500 | ||
On the basis of above analysis it is clear that if taxpayer have good amount of exemptions and deductions then existing regime is beneficial.
Now let’s scenario where taxpayer does not have any deductions[i] and exemptions and compare both existing and new tax regime:
Case 1: Gross Total Income of taxpayer is INR 10 Lakh
Calculation of Taxable Income:
| Particular | New Tax Slab | Existing Tax Slab |
| Total Income | 10,00,000 | 10,00,000 |
| Deductions | 0 | 0 |
| Taxable Income | 10,00,000 | 10,00,000 |
Calculation of tax payable (Comparison of Old Versus New Tax Regime under Income Tax Act):
| Income Tax Slab for New FY 2020-21 | New Tax Slab | Existing Tax Slab | Tax payable under new tax regime | Tax payable under existing tax regime |
| Up to Rs 2,50,000 | Nil | Nil | Nil | Nil |
| Rs 2,50,000 – Rs 5,00,000 | 5% | 5% | 12,500 | 12500 |
| Rs 5,00,000 – Rs 7,50,000 | 10% | 20% | 25,000 | 100,000 |
| Rs 7,50,000 – Rs 10,00,000 | 15% | 20% | 37,500 | |
| Rs 10,00,000 – Rs 12,50,000 | 20% | 30% | N.A. | N.A. |
| Rs 12,50,000 – Rs 15,00,000 | 25% | 30% | N.A. | N.A. |
| Above Rs 15,00,000 | 30% | 30% | N.A. | N.A. |
| Total Tax Payable | 75,000 | 1,12,500 | ||
Case 2: Gross Total Income of taxpayer is INR 15 Lakh
Calculation of Taxable Income:
| Particular | New Tax Slab | Existing Tax Slab |
| Total Income | 15,00,000 | 15,00,000 |
| Deductions | 0 | 0 |
| Taxable Income | 15,00,000 | 15,00,000 |
Calculation of tax payable (Comparison of Old Versus New Tax Regime under Income Tax Act):
| Income Tax Slab for New FY 2020-21 | New Tax Slab | Existing Tax Slab | Tax payable under new tax regime | Tax payable under existing tax regime |
| Up to Rs 2,50,000 | Nil | Nil | Nil | Nil |
| Rs 2,50,000 – Rs 5,00,000 | 5% | 5% | 12,500 | 12,500 |
| Rs 5,00,000 – Rs 7,50,000 | 10% | 20% | 25,000 | 1,00,000 |
| Rs 7,50,000 – Rs 10,00,000 | 15% | 20% | 37,500 | |
| Rs 10,00,000 – Rs 12,50,000 | 20% | 30% | 50,000 | 1,50,000
|
| Rs 12,50,000 – Rs 15,00,000 | 25% | 30% | 75,000 | |
| Above Rs 15,00,000 | 30% | 30% | N.A. | N.A. |
| Total Tax Payable | 2,00,000 | 2,62,500 | ||
Case 3: Gross Total Income of taxpayer is INR 25 Lakh
Calculation of Taxable Income:
| Particular | New Tax Slab | Existing Tax Slab |
| Total Income | 25,00,000 | 25,00,000 |
| Deductions | 0 | 0 |
| Taxable Income | 25,00,000 | 25,00,000 |
Calculation of tax payable (Comparison of Old Versus New Tax Regime under Income Tax Act):
| Income Tax Slab for New FY 2020-21 | New Tax Slab | Existing Tax Slab | Tax payable under new tax regime | Tax payable under existing tax regime |
| Up to Rs 2,50,000 | Nil | Nil | Nil | Nil |
| Rs 2,50,000 – Rs 5,00,000 | 5% | 5% | 12,500 | 12,500 |
| Rs 5,00,000 – Rs 7,50,000 | 10% | 20% | 25,000 | 1,00,000 |
| Rs 7,50,000 – Rs 10,00,000 | 15% | 20% | 37,500 | |
| Rs 10,00,000 – Rs 12,50,000 | 20% | 30% | 50,000 | 4,50,000
|
| Rs 12,50,000 – Rs 15,00,000 | 25% | 30% | 75,000 | |
| Above Rs 15,00,000 | 30% | 30% | 3,00,000 | |
| Total Tax Payable | 5,00,000 | 5,62,500 | ||
If we assumed that taxpayer does not have any deductions and exemptions then new tax regime shall be beneficial for taxpayer.
Conclusion: On the basis of analysis of above case studies it is clear that there is no straight answer whether which tax regime will be beneficial for taxpayer unless both tax regime compare with actual income and deductions details. However we also concluded that if volume of deductions and exemptions is high than taxpayer should continue for existing tax regime.
Note:
[i] In existing tax regime standard deduction from salary income shall be available however we ignored the same for better presentation.
II While calculating income tax we ignored cess and surcharge and considered only applicable rate of income tax.
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