The Income Tax Act is swamped with various provisions including numerous exemptions and deductions which makes compliance by the taxpayer a burdensome process, thereby discouraging them to become a genuine return filer and tax payer. 

In order to simplify compliance with the income tax law by a taxpayer, there have been amendments in the law to enable assesses to comply with the taxations laws without reaching out to professionals. 

The authorities have provided us with an option to choose a new personal tax regime wherein income tax rates will be significantly reduced for individuals/HUFs who forgo certain deductions and exemptions. The aim is to provide significant relief to taxpayers, especially to the middle income level population and make tax filing an easier affair..

Taxpayers can either choose to continue with the existing tax regime (Option 1) or apply for the new tax regime(Option 2). Comparative analysis of the two regimes and characteristics of the new regime have been explained in this article:

Applicability of new tax regime:

  • To whom is it applicable : Individuals and HUF (Hindu Undivided Family)
  • From when is it applicable : For incomes arising from April 1, 2020

What are the options When to choose
Those having business income Option to choose from the two systems is at the discretion of the taxpayer. However if in any of the subsequent years the chosen option is changed, it can never be changed again from that year onwards. In case there is no more business income in a year, decisions can be made on a yearly basis. On or before filing return of income in a prescribed form (to be notified later by the department)
Those having no business income Option to choose from the two systems is at the discretion of the taxpayer. It can be decided on a year-on-year basis whichever will be more beneficial in that year. At the time of filing return of income

  • What are the tax rates in the two options :

Income Slabs Old Rates (Option 1) New Rates (Option 2)
0 to 2.5 Lakhs Nil Nil
2.5 to 5 Lakhs 5% 5%
5 to 7.5 Lakhs 20% 10%
7.5 to 10 Lakhs 20% 15%
10 to 12.5 Lakhs 30% 20%
12.5 to 15 Lakhs 30% 25%
Above 15 Lakhs 30% 30%

Cess and surcharge provisions remain the same irrespective of the option chosen.

  • The new tax regime has placed a restriction on the following deductions/ exemption while computing the taxable income:

  1. Salaried person -

    1. House rent allowance, leave travel allowance, any other allowance granted by the employer (except few prescribed allowances). 
    2. Standard deduction, professional tax paid and entertainment allowance.

  1. Others (including salaried persons) -

    1. In case of self-occupied property, Interest on housing loan;
    2. Inc case of let-out property, Interest on housing loan is restricted to the taxable amount of rent received and intrahead set off are not permitted
    3. Cannot carry forward any house property losses
    4. Chapter VI-A deduction (Section 80C, 80D, 80E and so on, except Section 80CCD(2) and Section 80JJAA)
    5. Deduction from family pension income
    6. Additional depreciation under section 32
    7. Investment allowance under section 32AD
    8. Sector-specific business deductions under section 33AB and 33ABA
    9. Expenditure on scientific research under section 35
    10. Capital expenditure under section 35AD
    11. Exemption under section 10AA for SEZ units

In the case of a business income, an individual or HUF cannot claim set-off of the brought forward business loss or unabsorbed depreciation. 

The deductions are not available under the new regime to the extent they relate to deductions/ exemptions withdrawn.

This means no lengthy declarations/ proofs to submit to the HR every year.

Example:

  1. A person earning Rs 15 lac a year and who was not using any commonly available deductions (like Section 80C, 24B, etc.)

Tax under old scheme : 

Income and tax slabs Tax Amount
0-2.5 Lakhs - Nil 0
2.5 Lakhs to 5 Lakhs : 5% of (5 L - 2.5 L) 12,500
5 Lakhs to 10 Lakhs : 20% of (10 L - 5 L) 100,000
10 Lakhs to 15 Lakhs : 30% (15 L - 10 L) 150,000
262,500
Add cess @ 4% 10,500
Total Tax 273,000

Tax under new scheme : 

Income and tax slabs Tax Amount
0-2.5 Lakhs - Nil 0
2.5 Lakhs to 5 Lakhs : 5% of (5 L - 2.5 L) 12,500
5 Lakhs to 7.5 Lakhs : 10% of (7.5 L - 5 L) 25,000
7.5 Lakhs to 10 Lakhs : 15% of (10 L - 7.5 L) 37,500
10 Lakhs to 12.5 Lakhs : 20% of (12.5 L - 10 L) 50,000
12.5 Lakhs to 15 Lakhs : 25% of (15 L - 12.5 L) 62,500
187,500
Add cess @ 4% 7,500
Total tax 195,000

Difference between the two is INR 78,000. This much can be saved if the new scheme is opted.

  1. A person earning Rs 15 lac a year and who fully uses Rs 1.5 limit of Section 80C, pays home loan interest of Rs 1.6 lac, health insurance premium of Rs 17,000 and being salaried, gets a standard deduction of Rs 50,000 as well. So on a income of Rs 15 lac, this person gets deduction of Rs 1.5 lac + Rs 1.6 lac + Rs 50,000 + Rs 17,000 = Rs 3.77 lac.

Tax under old scheme : 

His Net Taxable Income is Rs 15 lac – Rs 3.77 lac (deductions) = Rs 11.23 lac.

Income and tax slabs Tax Amount
0-2.5 Lakhs - Nil 0
2.5 Lakhs to 5 Lakhs : 5% of (5 L - 2.5 L) 12,500
5 Lakhs to 10 Lakhs : 20% of (10 L - 5 L) 100,000
10 Lakhs to 15 Lakhs : 30%(11.23 L - 10 L) 36,900
149,400
Add cess @ 4% 5,976
Total Tax 155,376

Tax under New Tax Slabs:

In the new slab, there are no deductions. So taxable income is the full amount of Rs 15 lac:

Total tax as per above table - INR 195,000

Difference between the two is INR 39,624 roughly 40,000. In this case the old tax regime is beneficial. 

  • Every person will have his own unique New Tax Slab Vs Old Tax Slab calculation as the deductions claimed by the person may be unique to him. Each individual taxpayer will ideally have to do their own calculations and depending on the level of deductions and exemptions being claimed, it is better to pick the more favorable one between the two.

You can compare the tax between the two optional tax calculating systems on the official government site : https://www.incometaxindia.gov.in/pages/tools/income-tax-calculator.aspx


Disclaimer:

The contents of this article are for information purposes only and do not constitute any advice and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife Consulting is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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