New Tax Regime vs Old Income Tax Regime: Which one to opt for?

Published On: 23-Jul-2021

To simplify tax calculations and compliances, the government of India introduced an optional tax rate structure for individuals and HUFs from the financial year 2020-21 onwards. Even the old tax rate structure continues to be in place, and the taxpayers can choose the tax rate structure they want to adopt. 

While the new tax regime provides lower tax rates across different income slabs, it also takes away several available tax exemptions and benefits. As such, an additional step has been added to the tax filing process, which will require calculating the tax liability under both regimes. Here is a summary of the new tax regime to help you make an informed decision in this regard.

Tax Rates under the New Regime and Old Regime

The income tax (excluding cess and surcharge) must be calculated on the taxable income as per the following tax slabs:

Income slabs

Old Regime

New Regime

Upto Rs. 2.5 lakh

Nil

Nil

Rs. 2.5 lakh – Rs. 5 lakh

5%

5%

Rs. 5 lakh - Rs. 7.5 lakh

20%

10%

Rs. 7.5 lakh – Rs. 10 lakh

20%

15%

Rs. 10 lakh – Rs. 12.5 lakh

30%

20%

Rs. 12.5 lakh – Rs. 15 lakh

30%

25%

More than Rs. 15 lakh

30%

30%

The above table reflects the tax rates for an individual with age less than 60 years and HUF (Hindu Undivided Family). For senior citizens with age between 60 to 80 years, the basic exemption limit is Rs. 3 lakhs and for senior citizens with age more than 80 years, the basic exemption limit is Rs. 5 lakhs. Accordingly, for such senior citizen taxpayers, the tax rates will be zero percent till the income of Rs. 3 lakh and Rs. 5 lakh respectively.

Cess and Surcharge under the Income Tax

The tax payable as per the tax rates applicable to the taxpayer, whether under the old regime or the new regime, is further increased by health and education cess of 4% and surcharge as per the table below:

Particulars

Income less than Rs. 50 lakh

Income between Rs. 50 lakh and Rs. 1 crore

Income between Rs. 1 crore and Rs. 2 crore

Income between Rs. 2 crore and Rs. 5 crore

Income more than Rs. 5 crore

Rate of surcharge as % of income tax

0%

10%

15%

25%

37%

Tax Exemptions/ Deductions not available under the New Regime

Some of the major tax benefits that are not available under the new tax regime are as below:

  1. Standard Deduction of Rs. 50,000 allowed to salaried taxpayers
  2. Tax Deductions under Chapter VI-A of the Income Tax Act, including Section 80C (tax-saving payments/ investments), 80D (Medical insurance premium), 80G (donations) etc.
  3. Exemption towards HRA (House Rent Allowance)
  4. Exemption in respect of Leave travel concession
  5. Prescribed Exempt allowances u/s 10(14);
  6. Exemption in respect of the income of minor
  7. Entertainment allowance
  8. Deduction towards Professional tax
  9. Deduction in respect of interest on housing loan in respect of self-occupied house
  10. Deduction towards family pension
  11. Exemption in respect of free food and beverage through vouchers provided to the employee

Tax Benefits presently continued under the New Regime

While introducing the new tax regime, the Hon’ble Finance Minister showed an inclination to eliminate all the tax benefits and instead lower the tax rates to simplify the tax compliances. It had then been indicated that all the tax benefits would be steadily phased out. However, some of the tax benefits still allowed under the new tax regime are as below:

  1. The benefit of tax rebate under Section 87A provides a tax rebate of up to Rs. 12,500 if the taxpayer’s taxable income does not exceed Rs. 5 lakhs. 
  2. Deduction under section 80CCD(2) (employer contribution towards notified pension scheme) 
  3. Transport Allowance granted to a divyang (person with a disability) or disabled employee commuting between residence and place of duty.
  4. Conveyance Allowance for expenditure in performance of duties of an office
  5. Any Allowance granted to meet the cost of travel on tour or transfer.
  6. Daily Allowance to meet the ordinary daily charges incurred due to absence from his/her usual place of duty
  7. Gifts received from employer up to Rs. 5,000

Which tax regime is better?

One should understand that there is no single correct answer to this question. 

One may need to make a comparison by calculating the taxes under both the tax structures and choosing the regime, resulting in lower tax liability. It may also be essential to note that the Income Tax Rules provide flexibility to the taxpayers without business income to make an option every year. The taxpayers may not stick to a single tax regime and change their tax structure every year, depending on the effective tax outgo. However, the taxpayers with business income are allowed to opt for new tax regime only once and such option will continue to apply for subsequent years. While such taxpayers are allowed to withdraw such an option once, but thereafter, taxpayers will not be allowed to opt for the new tax regime, provided the tax payer continues to have business income.

Each tax regime has its pros and cons. While the old tax regime provides for several additional tax benefits, the new tax regime comes with lower tax rates. There are some standard deductions availed by the taxpayers, which may include Section 80C benefit of up to Rs. 1.50 lakhs, Standard deduction of Rs. 50,000 for the salaried taxpayers, a tax deduction for voluntary contribution in National Pension Scheme (NPS) account of up to Rs. 50,000, etc. 

Further, one may also be availing tax benefits towards HRA (House Rent Allowance) and LTC (Leave Travel Concession) exemption. If one avails all of such deductions entirely, one can consider to opt for  the old tax regime. 

Section 80C gives individuals a very favourable opportunity of saving significant taxes at the same time help their money grow over a period of time by investing various available options. Here, one can consider investing in Equity Linked Savings Scheme (ELSS) which are increasingly getting popular over the years. An ELSS, not only helps save taxes for the investor, but also channelises the investors towards investments with a potential of higher returns over time. Such tax benefits for investment in ELSS are available only under the old tax regime and not under the new tax regime. While investing in mutual funds including ELSS may not be driven solely for tax benefits, a tax rebate towards such investment is an added advantage which also has one of shortest lock-in period among other Section 80C options.

Note: The tax provisions mentioned above are updated as per the Finance Act 2021. Such provisions may be subject to changes/ amendments at a later stage. One may also consult professional tax consultants for personalized tax advice. 

Disclaimers:

The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.

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