New Tax Regime vs Old Tax Regime

The Finance Act 2020 brought quite a few changes to our system of Direct Taxes. The most noteworthy change was the introduction of the New Tax Regime under section 115BAC of Income Tax Act, 1961. On one side, this new regime comes with lower slab rates, and on the other, it deprives the assessees of many deductions and claims. However, this scheme is absolutely optional, and the taxpayers can choose to continue with the old method of calculating taxes, in which they can claim all the accessible deductions and exemptions.

So, are you confused between the old and the new tax regimes? Are you still unclear about the new system? Are you dicy on which tax system is more beneficial for you?If all this confusion surrounds you and you are questioning which taxation regime to pick, please read the below article to understand these two methods of taxation.

Old Tax Regime

The old tax regime has different exemption limits for individuals below the age of 60 years, between 60 and 80 years, and above 80 years. 

Furthermore, the old method allows the assessees to claim various deductions on their tax-saving investments, interest paid on housing loans, etc., and exemptions on different allowances. Below are the tax rates according to the old tax regime:
 

Old income slabs	Tax rates for persons below 60 years	Tax rates for persons between 60 and 80 years	Tax rates for persons above 80 years
Up to Rs. 2,50,000	Nil	Nil	Nil
Rs. 2,50,001 to Rs. 3,00,000	5%	Nil	Nil
Rs. 3,00,001 to Rs. 5,00,000	5%	5%	Nil
Rs. 5,00,001 to Rs. 10,00,000	20%	20%	20%
Above Rs. 10,00,000	30%	30%	30%

New Tax Regime

The Income Tax rates are the same across all age groups as per the new tax regime. The income slabs are smaller, and there are seven slabs in the new tax system. The Income Tax rates as per the new tax regime are specified in the table below:
 

New income slabs	Tax rates applicable
Up to Rs. 2,50,000	Nil
Rs. 2,50,001 to Rs. 5,00,000	5%
Rs. 5,00,001 to Rs. 7,50,000	10%
Rs. 7,50,001 to Rs. 10,00,000	15%
Rs. 10,00,001 to Rs. 12,50,000	20%
Rs. 12,50,001 to Rs. 15,00,000	25%
Above Rs. 15,00,000	30%

 
So, it can be seen in the above table that the new tax regime steadily increases the tax rates from one income slab to another.

Deductions & exemptions to be forgone while opting for the new tax regime

The government has considered that the Act provides various exemptions and deductions, which make compliance by the assessee and administration of the tax laws by the tax authorities a cumbersome process.

Hence, the new tax regime requires a number of deductions and exemptions to be forgone. Thus, it is imperative to evaluate the impact of deductions/exemptions that need to be given up to benefit from lower tax rates. Some of the common tax exemptions/deductions which are not allowed to be claimed under the new regime include:

* Leave travel allowance (LTA)

* House rent allowance (HRA)

* Children education allowance

* Standard deduction on salary

* Deduction for professional tax

* Interest paid on housing loan in case of self-occupied property

* Deduction for investments or expenses under Chapter VI-A like:

       * deduction u/s 80C towards contribution to Public Provident Fund, payment of children’s tuition fees, life insurance premium, principal on housing loan, etc.

        * other deductions towards medical insurance premium, medical expenditure, interest on education loan, donations, etc.

Opting for the new tax regime 

An individual or HUF taxpayer (resident and non-resident) may opt for the new tax regime based on the respective applicable deductions/exemptions and sources of income. Switching between the old and new tax regimes can be done either yearly or only once. The frequency of opting for the new tax regime depends on the source of income during the financial year. The same has been discussed below:

* Where income includes income from business or profession:

If an individual or HUF has income from a business or profession, once the option to avail new tax regime for a financial year has been exercised, then the new rates shall apply for subsequent years as well. However, the Act provides such assessees one single option of switching back to the old tax regime. Once this switchback option has been exercised, then again new tax regime cannot be opted for in a lifetime unless the assessee ceases to have income from a business or profession.

* Where income does not include income from business or profession:

If an individual or HUF does not have income from a business or profession, then the selection can be made on a yearly basis. For salaried individuals, the employer is required to withhold tax before the payment of the salaries. Hence, the employee is needed to inform the employer regarding his preferred tax regime.

An employee may select between old and new tax rates and intimate his employer at the beginning of the financial year or at the time of joining new employment during the year. However, when filing the Income Tax return, the employee can change the tax regime initially selected.

For instance, at the beginning of the financial year, an employee chooses the new tax regime, and his employer deducts tax from his salary based on slab rates under the new regime. However, during the year, he makes certain tax-saving investments such as contribution to PPF, Sukanya Samriddhi Scheme, etc., and at the time of filing his Income Tax return, he realises that the old tax system is more beneficial to him. In such a scenario, he can opt for the old tax regime while filing his return of income though the employer had deducted taxes based on the new regime.

Continuing with the Old Tax Regime

The old tax regime has been in place for quite some time now, and the assessees are perhaps more accustomed to it. However, the answer to whether or not they should select this old method depends mainly on the slab in which their income falls and the tax-saving investments they have in their portfolio.

Since this regime allows them deductions involving tax-saving investments, it’s suitable to opt for this option if their portfolio includes a considerable amount of the same. By doing so, they can claim the benefit of deduction up to Rs. 1.5 lakhs permitted under section 80C and drastically reduce their Income Tax liability.Taxpayers can avail of a further deduction of Rs.50,000 for investments made in NPS u/s 80CCD(1B). The old system offers the assessees other advantages also, such as HRA exemption, LTA exemption and deductions like the deduction for home loan interest up to Rs. 2 lakhs and deduction for donations, to name a few. Hence, the assessees can opt for this tax regime if they are eligible of claiming such deductions and exemptions offered in the old Income Tax regime.

Opting for the New Income Tax Regime

The assessees could be charged a lower tax rate as per the new tax regime, subject to their income level. For example, if a taxpayer’s total taxable income is Rs. 6,75,000, he would fall in the 20% tax slab as per the old method. Whereas, as per the new tax rates, the maximum rate chargeable on his income would be only 10%.The new tax regime gradually increases the tax rate from one income slab to another. This shows that the new regime is better suited for lower-income groups, freshers who wish to avoid paperwork and pensioners.

Moreover, since the new tax system does not allow any deductions from taxable income, a person having less tax-saving investments may get more benefits from the new tax rates. Those having a small home loan amount can also consider the lower tax system.

Individuals and HUF can adopt new tax rates if their tax liability is low in the new tax regime compared to the old tax regime.

Crucial points to keep in mind before opting for any one regime

Before selecting between the old and new regimes, it would be fruitful to follow the following steps:

* Recognise the deductions and exemptions available and applicable to you.

* Calculate your total taxable income before and after taking deductions into consideration and determine the tax liabilities as per the old and the new regimes and decide accordingly.

* Furthermore, consider your long-term goals and strategise your investments suitably. It’s not wise to avoid investing in tax-saving options just for opting for the new tax scheme.

Summing Up

Both the regimes have their own sets of pros and cons. The old system offers many exemptions and deductions under numerous sections – availing a few of these require people to invest in tax-saving investment options, helping inculcate a good habit of investing. On the other hand, the new regime gives people more flexibility and tries to simplify the process. 

Whether the new scheme works for an assessee or the old one will depend on the income composition and deductions available, and one will have to decide based on his circumstances. The alternatives must be evaluated prudently, and online tax calculators can be used to determine the tax liability under each method before selecting between the two taxation methods.

In conclusion, the decision to choose between the old and new tax regimes depends on individual circumstances and financial goals. Assess your deductions, taxable income, and long-term objectives to make an informed choice. Remember, investing in tax-saving options is still important, regardless of the tax scheme you select.

Discover which tax regime is more beneficial for you. Understand the differences and make an informed decision. Read our article and contact us for more details at info@manishanilgupta.com.

Disclaimer: The information given above by the author is to provide general guidance to the readers. This information should not be sought as a substitute for legal opinion.