Old Tax vs New Tax Regime: Current year is essentially important from view point of taxpayers because from this Assessment Year i.e. from A.Y.2021-22, New Tax Regime has been introduced by Finance Minister for Income Tax Computation and Payment.
With the initiation of a new tax regime, comes the confusion of which one is suitable for you. You, as the taxpayer, may find it challenging to identify which one of the two regimes is better and relevant to your income. With alterations in existing sections, many of you are trying to evaluate the difference between the old tax vs the new tax regime. Here I have made a small note on the present tax REGIME and new tax REGIME.
The New Tax Regime
Let’s discuss the new tax regime. It offers six tax slabs with prevailing rates reduced on income up to Rs. 15 lakh. Due to the income slabs and the various tax rates, multiple exemptions and deductions are not applicable here. New tax regime is having its own advantages and disadvantages. Let us discuss…………
Advantages
- 1) The current tax regime is still in place, and you as a taxpayer have the option to choose the best suitable one for you, that is either the old tax regime or the new tax regime. The Government has not enforced compulsion to switch to the new tax regime.
- 2) The new tax regime offers the flexibility to the taxpayer to invest their money as they prefer. With the new scheme, there is no obligatory requirement to invest in tax saving schemes and insurance plans which may not be in alignment with their financial goals.
- 3) With multiple tax slabs, you as the taxpayer will fit into the tax slab that best meets your yearlyincome.
Disadvantages
- 1) Gradually, the present exemptions will be reviewed and slowly erased from the new tax regime.
- 2) With no exemptions, your total taxable amount will be higher as compared during the old tax regime.
- 3) Though there are six tax slabs, it may not be beneficial for all taxpayers if the income-tax authorities decide to do away with the old regime completely.
Characteristics of New Tax Regime:
- It is optional whether to go for new or existing tax regime for all taxpayers.
- For Salaried Taxpayers, It is allowed to go for selection of and switch over from new to existing and existing to new Tax Regime for every year. They have option to select the tax regime every year.
- For Business Taxpayers, It is allowed only once to select the tax regime. After selecting one in AY 21-22, they can switch over only one time and then after they have to compulsorily continue with the selected tax regime.
Deductions that will continue to allowed to Taxpayers in New Tax Regime under section 115BAC:
- In case of Handicapped employee, Transport Allowance of Rs. 3200/-p.m. , Conveyance, Tour and Daily allowances incurred for duty purpose will be continued even in New Scheme.
- Standard Deduction of 30% under section 24 (a) on Rental Income from Rented Property.
- Gratuity, Provident Fund, Leave Encashment exemption on receipt at the time of retirement
- Interest on Tax Free Bonds
- Interest on Public Provident Fund (PPF)
- Interest on Sukanya Samriddhi Yojana
- Existing exemptions on Agricultural Income
- Rebate under section 87A
- Employer’s contribution on account of employee in case of Investment in NPS under section 80CCD
Deductions that are NOT ALLOWED under New Tax Regime:
- Deductions under section 80C of Chapter VIA of LIC Premium, Specified Mutual Funds Investments, Nationalized Bank Deposits, Repayment of Housing Loan Principal, Stamp Duty, Tuition Fees, etc.
- Extra Deduction of Rs. 50,000/- on NPS Investment under section 80CCD
- Medical Insurance Premium (Mediclaim) or Medical Expense incurred for self, family of parents under section 80D
- Bank Savings Accounts Interest under section 80TTA
- Banks Fixed Deposit Interest under section 80TTB
- In case of Salaried employees,
- Transport Allowance
- Conveyance Allowance
- Medical Allowance
- House Rent Allowance
- Children Education, Uniform Allowances, etc. allowed as deduction under section 10 will no more be allowed as deduction
- Perquisites
- Standard Deduction under section 16
- Entertainment Allowance under section 16
- Professional Tax
- Interest on Housing Loan up to Rs.2, 00,000/- under section 24 (b) as well as additional deduction of Rs.1, 50,000/- in
specified cases under section 80EEA are no more allowed as deductions under New Scheme. - Family Pension under section 57
- Deductions under section 80DD and 80DDB in case of Disability
- Interest on Education Loan under section 80E
- Donations to Charitable Institutions under section 80G
Switching from one regime to another
The salaried have the option to choose between both the regimes every year. Even if you have opted a particular tax regime with your employer, you can still choose the other regime while filing your ITR in case the other option seems more beneficial to you while computing the tax liability at the time of filing the ITR.
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Please note that the self-employed do not have the choice to come back to old tax regime once the new one is opted unless they stop having business income. So the person with business income has to be vary careful while migrating to new regime.
Tax Slab and Tax Rates for Individuals:
| Taxable Income Slabs | Tax Rate as per Old Scheme | Tax Rate as per New Scheme |
| Up to Rs. 2,50,000/- | NIL | NIL |
| Rs. 2,50,001/- to 5,00,000/- | 5% | 5% |
| Rs. 5,00,001/- to 7,50,000/- | 20% | 10% |
| Rs. 7,50,001/- to 10,00,000/- | 20% | 15% |
| Rs. 10,0,0001/- to 12,50,000/- | 30% | 20% |
| Rs. 12,50,001/- to 15,00,000/- | 30% | 25% |
| Above Rs. 15,00,000/- | 30% | 30% |
Illustration 1:
Calculation of Income Tax of Taxpayer having Taxable Income below Rs.10,00,000/-:
| Particulars | Calculation as per Old Scheme | Calculation as per New Scheme |
| Gross Salary | 7,50,000.00 | 7,50,000.00 |
| Less: Standard Deduction | 50,000.00 | – |
| Less: Professional Tax | 2,400.00 | – |
| Net Salary | 6,97,600.00 | 7,50,000.00 |
| Less: Home Loan Interest on SOP | 1,50,000.00 | – |
| Add: Bank Savings Account Interest | 25,000.00 | 25,000.00 |
| Total Gross Income | 5,72,600.00 | 7,75,000.00 |
| Less: Deduction under Chapter VIA | ||
| Investments under section 80C | 1,50,000.00 | – |
| NPS Investments under section 80CCD | 50,000.00 | – |
| Mediclaim under section 80D | 25,000.00 | – |
| Bank savings account Interest u/s 80TTA | 10,000.00 | – |
| Net Taxable Income | 3,37,600.00 | 7,75,000.00 |
| Tax Payable | 3,755.00 | 38750 |
| Taxable Income | 3,37,600.00 | 7,75,000.00 |
| Less: Maximum amount not chargeable to Tax | 2,50,000.00 | 2,50,000.00 |
| 87,600.00 | 5,25,000.00 | |
| Less: Rebate u/s 87A | 12,500.00 | – |
| 75,100.00 | 5,25,000.00 | |
| 250001 to 500000 5% | 3,755.00 | 13,750.00 |
| 500001 to 750000 10% | – | 25,000.00 |
| Total Tax Payable | 3,755.00 | 38,750.00 |
Illustration 2:
Calculation of Income Tax of Taxpayer having Taxable Income above Rs.10,00,000/-:
| Particulars | Calculation as per Old Scheme | Calculation as per New Scheme |
| Gross Salary | 11,00,000.00 | 11,00,000.00 |
| Less: Standard Deduction | 50,000.00 | – |
| Less: Professional Tax | 2,400.00 | – |
| Net Salary | 10,47,600.00 | 11,00,000.00 |
| Less: Home Loan Interest on SOP | – | – |
| Add: Bank Savings Account Interest | 25,000.00 | 25,000.00 |
| Total Gross Income | 10,72,600.00 | 11,25,000.00 |
| Less: Deduction under Chapter VI A | ||
| Investments under section 80C | 1,50,000.00 | – |
| NPS Investments under section 80CCD | – | – |
| Mediclaim under section 80D | 25,000.00 | – |
| Bank savings account Interest u/s 80TTA | 10,000.00 | – |
| Net Taxable Income | 8,87,600.00 | 11,25,000.00 |
| Tax Payable | 90,020.00 | 1,00,000.00 |
| Taxable Income | 8,87,600.00 | 11,25,000.00 |
| Less: Maximum amount not chargeable to Tax | 2,50,000.00 | 2,50,000.00 |
| 6,37,600.00 | 8,75,000.00 | |
| Less: Rebate u/s 87A | – | – |
| 6,37,600.00 | 8,75,000.00 | |
| 250001 to 500000 5% | 12,500.00 | 12,500.00 |
| 500001 to 750000 20% 10% | 50,000.00 | 25,000.00 |
| 750001 to 1000000 20% 15% | 27,520.00 | 37,500.00 |
| 1000001 to 1250000 30% 20% | – | 25,000.00 |
| 1250001 to 1500000 – 25% | – | – |
| Above 1500000 30% | – | – |
| Total Tax Payable | 90,020.00 | 1,00,000.00 |
In above both cases, Tax payable is lower in case of Old Scheme only as taxpayers have enough investments to take deductions.
Illustration 3:
Calculation of Income Tax of Taxpayer having Taxable Income above Rs.10,00,000/-:
| Particulars | Calculation as per Old Scheme | Calculation as per New Scheme |
| Gross Salary | 11,00,000.00 | 11,00,000.00 |
| Less: Standard Deduction | 50,000.00 | – |
| Less: Professional Tax | 2,400.00 | – |
| Net Salary | 10,47,600.00 | 11,00,000.00 |
| Less: Home Loan Interest on SOP | – | – |
| Add: Bank Savings Account Interest | ||
| Total Gross Income | 10,47,600.00 | 11,00,000.00 |
| Less: Deduction under Chapter VI A | ||
| Investments under section 80C | 75,000.00 | – |
| NPS Investments under section 80CCD | – | – |
| Mediclaim under section 80D | 25,000.00 | – |
| Bank savings account Interest u/s 80TTA | – | |
| Net Taxable Income | 9,47,600.00 | 11,00,000.00 |
| Tax Payable | 1,02,020.00 | 95,000.00 |
| Taxable Income | 9,47,600.00 | 11,00,000.00 |
| Less: Maximum amount not chargeable to Tax | 2,50,000.00 | 2,50,000.00 |
| 6,97,600.00 | 8,50,000.00 | |
| Less: Rebate u/s 87A | – | – |
| 6,97,600.00 | 8,50,000.00 | |
| 250001 to 500000 5% | 12,500.00 | 12,500.00 |
| 500001 to 750000 20% 10% | 50,000.00 | 25,000.00 |
| 750001 to 1000000 20% 15% | 39,520.00 | 37,500.00 |
| 1000001 to 1250000 30% 20% | – | 20,000.00 |
| 1250001 to 1500000 – 25% | – | – |
| Above 1500000 30% | – | |
| Total Tax Payable | 1,02,020.00 | 95,000.00 |
In above Illustration, Taxpayers have benefit in case of New Scheme as they do not have enough investments that can be
taken as deductions by them.
But, even if there are not enough investments then also taxpayers will get benefit under Old Regime in case Taxable Income is below Rs. 5, 00,000/- as Rebate under section 87A is available to them under old tax regime. It can be seen by following Illustration.
Illustration 4:
Calculation of Income Tax of Taxpayer having Taxable Income below Rs.10,00,000/-:
| Particulars | Calculation as per Old Scheme | Calculation as per New Scheme |
| Gross Salary | 7,50,000.00 | 7,50,000.00 |
| Less: Standard Deduction | 50,000.00 | – |
| Less: Professional Tax | 2,400.00 | – |
| Net Salary | 6,97,600.00 | 7,50,000.00 |
| Less: Home Loan Interest on SOP | – | – |
| Add: Bank Savings Account Interest | – | – |
| Total Gross Income | 6,97,600.00 | 7,50,000.00 |
| Less: Deduction under Chapter VI A | ||
| Investments under section 80C | 75,000.00 | – |
| NPS Investments under section 80CCD | 50,000.00 | – |
| Mediclaim under section 80D | 25,000.00 | – |
| Bank savings account Interest u/s 80TTA | – | |
| Net Taxable Income | 5,47,600.00 | 7,50,000.00 |
| Tax Payable | 14,255.00 | 37,500.00 |
| Taxable Income | 5,47,600.00 | 7,50,000.00 |
| Less: Maximum amount not chargeable to Tax | 2,50,000.00 | 2,50,000.00 |
| 2,97,600.00 | 5,00,000.00 | |
| Less: Rebate u/s 87A | 12,500.00 | – |
| 2,85,100.00 | 5,00,000.00 | |
| 250001 to 5000005% | 14,255.00 | 12,500.00 |
| 500001 to 750000 10% | – | 25,000.00 |
| Total Tax Payable | 14,255.00 | 37,500.00 |
Conclusion
Old Tax vs New Tax Regime: Which one would you choose?
There is no specific answer to this question as it depends on your financial situation and your annual earnings. Both the new income tax slab vs old tax slab have its advantages and disadvantages. It all depends on whether you are interested in claiming the deductions and exemptions with the new tax slab offering a variation of earning buckets and corresponding rates. The old tax slab offers deductions and exemptions. It is recommended to do a comparative analysis and evaluation under both the tax regimes before you proceed to file your taxes.
As whole if the assesse is having more savings and exemptions old regime is better otherwise he can opt new regime.