Old Tax Regime Vs New Tax Regime. Know which one you should opt for?

Last Updated On: May 13, 2021, 10:56 p.m.
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OLD TAX REGIME Vs NEW TAX REGIME?

 KNOW WHICH ONE YOU SHOULD OPT FOR?

This is the first year to choose, between the old tax regime with deductions and exemption and new tax regime without deductions and exemption but with lower slab rates, while filing your ITR. Taxpayer are confused as to which one to opt for. Let us broadly discuss the features of both the regime.

The option of new tax regime is available to all individuals and HUFs. This is optional. Under the new tax regime tax is payable at lower slab rates on the income up to Rs. 15 lakh as compared to old regime. Under the new regime tax slabs rates of 5%, 10%, 15%, 20% and 25% are applicable on each successive increase of Rs. 2.50 lakh starting from the basic exemption of Rs. 2.5 lakh till 15 lakhs of total income.

If you wish to opt for the new tax regime you have to forgo various tax deductions and exemptions otherwise available under old regime. Under the new tax regime, salaried people cannot avail major benefits of items like standard deduction, House Rent Allowance (HRA), Leave Travel Assistance (LTA) and even some of the allowances allowed for performing duties. Various deductions like those available under Section 80 C (comprised of various items like EPF, LIP, School Fee, PPF, NSC, ELSS, home loan repayment etc.) , 80D (for health insurance premiums) , 80 CCD(1) & 80 CCD(1B) (for NPS) will also not be available to both categories of taxpayer i.e. salaried and self-employed. You also forfeit the claim for home loan interest for self-occupied as well as to set off or carry forward the loss in respect of let out property. You also will not be able to set off any brought forward losses against current income under new scheme.

Likewise retired senior citizen cannot claim standard deduction against pension received by them in respect of their past employment. Deduction up to Rs. 50,000 available to senior citizen for interest from post office and banks u/s 80TTB will also not be available.

 

How the scheme works:

As one can claim various exemptions and deduction and the composition of these tax benefits widely differ from person to person, a readymade comparative calculation chart cannot be given as to depict which regime is beneficial. However, looking at the tax benefits which majority of the taxpayer have to forgo, the benefits available with existing regime outweigh the benefits of lower rates of tax by migrating to new regime. Let us try to understand the implications with examples.

First let us take case of a salaried person. Since majority of salaried either claim benefit of HRA for rent paid or in all probability would have bought a house with home loan. Presuming he has bought a house with home loan, he has to forgo home loan benefits for interest as well as principal repayment for 3.50 lakh taken together comprised of 1.50 lakh under Section 80C for principal prepayment and Rs. 2 lakh for home loan interest for self-occupied house property. After taking into account the fact that he also will have to forgo standard deduction of Rs. 50,000/-, he will have to forgo to deduction of Rs. 4,00,000/- resulting in tax impact of Rs. 80,000 if he is in 20% tax slab having income between ₹5 lakh to 10 lakh. The net tax benefit forgone is higher than the tax liability of Rs. 62,500 under new scheme. For those in 30% tax slab the tax effect of the benefit forgone @ 30% would be 1.20 lakh against the tax saving of Rs. 37,500 accruing by opting for new regime.

Now let us take an example for a self-employed person who can avail full deduction under Section 80 C for Rs. 1.50 lakh and for Rs. 50,000/- under Section 80CCD(1B) for contribution towards National Pension System for easy understanding of both the regimes. Presuming aggregate income of Rs. 7 lakhs he will have a tax liability of Rs. 32,500/- under new tax regime. However if he is able to claim deduction of Rs. 2 lakhs explained above he will be able to reduce his total income to 5 lakhs on which he will not have to pay any tax due to rebate of Rs. 12,500 available u/s 87A. By investing two lakh rupees one can save Rs. 32,500 of tax under the old regime.

 

Let us get to know about Old Tax Regime and New Tax Regime in detail:

Income Slabs Old Tax Regime(%) New Tax Regime(%)
Up to Rs. 2.50 Lakh 0 0
Rs. 2.50 Lakh to Rs. 5 Lakh 5 5
Rs. 5 Lakh to Rs. 7.50 Lakh 20 10
Rs. 7.50 Lakh to Rs. 10 Lakh 20 15
Rs. 10 Lakh to Rs. 12.50 Lakh 30 20
Rs. 12.50 Lakh to Rs. 15 Lakh 30 25
Above Rs. 15 Lakh 30 30

 

Extent of exemptions and deduction available with the taxpayers under OLD vs new Not all deduction is not available under new Tax regime.

There are certain which are also available in new Tax regime which are tabulated below:

Particulars Old Tax Regime New Tax Regime
HRA and LTA exemption u/s 10 YES NO
8OC Investments (Provident Fund, PPF, Tax saving FD and MF, etc.) YES NO
Medical Insurance premium u/s 80D YES  NO
Housing loan- Deduction towards Interest & Principle repayment YES  NO
Standard Deduction on salary and Profession Tax u/s 16 YES NO
Savings Bank Interest deduction u/s 80TTA (Deduction up to Rs.10,000) YES  NO
Standard Deduction (30% of the Net Annual Value) u/s 24 YES YES
Rebate u/s 87A YES YES
Benefits of Lower Tax rates NO YES



 

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