Old vs. New Income Tax Slab

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In the new budget for the fiscal year 2020-21, Finance Minister Nirmala Sitharaman introduced the new income tax rate for tax-payers in India. The Finance minister said in her budget speech that the Current Income Tax Act is full of various exemptions and deductions that make compliance complicated and a burdensome process for the taxpayers.

Though the removal of tax deductions and exemptions would make the compliance less tedious, those who have maintained their financial portfolio to avail tax deductions as per the old slab are likely to pay more tax under the new tax slabs.

The new budget tries to curtail the option to save the incentives and puts more money in the hands of taxpayers. However, the Individuals and Hindu Unified Families (HUF) are given an option to choose between the old and the new tax regime.

So, coming to the old tax rates-  it was nil for the annual income up to Rs. 2.5 lakhs, 5% for annual income between Rs. 2.5 lakhs to Rs. 5 lakhs. 10% for income group between Rs. 5 lakh and Rs. 12.5 lakh and 30% for 12.5 and above.

And in the new tax regime, the income group between Rs. 5 lakhs and Rs. 7.5 lakhs would be required to pay income tax at 10%. And the income group ranging from Rs. 7.5 lakhs to Rs. 10 lakh will be required to pay tax at 15%. And those falling in the income group of Rs. 10-12.5 lakhs and Rs. 12.5-15 lakhs will be levied tax at 20% and 25% respectively. It is seen that with the new tax regime is likely to make taxpayers pay a higher tax amount in the long-term in comparison to the old regime.

And in the old tax regime, the taxpayers benefitted from several tax exemptions and deductions including tax deductions on health insurance and ELSS investments under section 80 C and house rent allowance, which is not possible on switching to the new system. Because the new tax policy does not offer exemptions like the old one.

Simply put, if you are a salaried taxpayer then you will have to forgo the available deductions under the old tax regime under chapter VI-A, such as investments under Section 80C, HRA, health insurance premium, etc.

But there are no changes in the surcharge; it will remain the same as the old one- 10% for Rs. 50 lakhs to Rs. 1 Crore, 15% for Rs. 1 Crore to Rs. 2 Crores, 25% for Rs. 2 Crores to Rs. 5 Crores and 37% for over and above Rs. 5 Crores.

Let’s discuss how the new and old tax slab rates differ for each income group. And what are the exemptions that are taken off the budget.

Tax Slabs and Rates under the New Regime

The exemption is given to people earning up to Rs. 5 lakh remains the same. Below is the table with the old and new tax rate as applicable on the annual income:

Annual Income (Rs.) Old Tax Rate New Tax Rate
Up to Rs. 2.5 lakhs Nil Nil
Rs. 2.5 lakhs to Rs. 5 lakhs 5% 5%
Rs. 5 lakhs to Rs. 7.5 lakhs 20% 10%
Rs. 7.5 lakhs to Rs. 10 lakhs 20% 15%
Rs. 10 lakhs to Rs. 12.5 lakhs 30% 20%
Rs. 12.5 lakhs to Rs. 15 lakhs 30% 25%
Rs. 15 lakhs and above 30% 30%

Things to consider:

  • The above-mentioned new rates are without any deductions under different sections of Chapter VI-A.
  • If a tax-payer claims a deduction of Rs. 2.5 lakhs (standard deduction of Rs. 50,000, Rs. 1.5 lakhs u/s 80C and investment in NPS of Rs. 50,000), the tax will remain the same as the old one.
  • In case he also claims home loan interest deduction of Rs. 2 lakhs or HRA exemption, the old tax slab rate would be Rs. 46,800 lesser than the new regime.

Here’s how the new and the old tax regime will impact the tax payers at different income levels.

Individual Income Rs. 10 lakhs, living in own house so does not claim HRA and is under 60 years of age group.

  Old Slabs Old Tax Rates (in Rs.) New Slabs New Tax Rates (in Rs.)
Income   10,00,000   10,00,000
Deductions 80C   150,000   N/A
Deductions 80 D   25,000   N/A
House Loan   200,000   N/A
Standard Deduction   50,000   N/A
Taxable Income   5,75,000   10,00,000
Slabs 2.5-5 lakhs at 5% +5-7.5 lakhs at 20% 12500+15000 Rs. 2.5-5 lakhs at 5% +Rs. 5-7.5 lakhs at 10%+ Rs. 7.5-10 lakhs 12500+25000+37,500
Total tax payable as per the income tax slab   27,500   75,000

Now let’s see how the income group above Rs. 15 lakhs will be charged in the old regime and the new regime. This is a separate calculation from the above table:

Income: Rs. 15 lakhs

  Old Regime with Deductions (in Rs.) Old Regime without Deductions (in Rs.) New Regime (in Rs.)
Income 15 lakhs 15 lakhs 15 lakhs
Exemptions/Deductions 2 lakh (Rs. 1.5 lakhs u/s 80C + Rs. 50,000 standard deduction) Nil Nil
Taxable Income 13 lakhs 15 lakhs 15 lakhs
Total Tax 202,500 262,500 187,500

Income: Rs. 30 lakhs      

  Old Tax Rate with Deductions (in Rs.) Old Tax Rate without Deductions (in Rs.) New Regime (in Rs.)
Income 30 lakhs 30 lakhs 30 lakhs
Exemptions/Deductions 425000 Nil Nil
Taxable Income 25,75,000 30,00,000 30,00,000
Total Tax 585,000 712,500 637,500

The above payable tax would include Cess @ 4% extra. The above calculation is for reference purpose only.

* Deductions Applicable: Rs 1.5 lakhs u/s 80C; Rs. 50,000 standard deduction; Rs. 25,000 u/s 80D; Rs. 2 lakhs home loan interest u/s 24.

Income: Rs. 60 lakhs

  Old Tax Rate with Deductions (in Rs.) Old Tax Rate without Deductions (in Rs.) New Regime (in Rs.)
Income 60 lakhs 60 lakhs 60 lakhs
Exemptions/Deductions 425,000 Nil Nil
Taxable Income 55,75,000 60,00,000 60,00,000
Surcharge @ 10% 1,48,500 161,250 1,53,750
Total Tax 16,33,500 17,73,750 16.91,250

* Deductions Applicable: Rs 1.5 lakhs u/s 80C; Rs. 50,000 standard deduction; Rs. 25,000 u/s 80D; Rs. 2 lakhs home loan interest u/s 24.

Exemptions and Deductions

Here is the difference between the exemptions and deductions between the old tax regime and the new tax regime:

Old Tax Regime New Tax Regime
  • Allows the following exemptions:
  • Standard deduction
  • House rent allowance
  • Section 80C investments
  • Housing loan interest
  • Medical insurance premium
  • Education loan interest Leave travel allowance
  • Savings bank interest
  • Takes off the 70 exemptions that were permitted under the following:
  • Education loan interest
  • Section 80C investments
  • Housing loan interest
  • House rent allowance
  • Leave travel allowance
  • Standard deduction
  • Medical insurance premium
  • Savings bank interest
Only 50 tax exemptions are permissible:
  • Standard deduction on rent
  • VRS proceeds
  • Agricultural income
  • Retrenchment compensation
  • Income from life insurance
  • Leave encashment on retirement
  • Deductions allowed under the old tax regime:
  • Deduction under section 80C, 80CCC, 80CCD
  • 80G, 80GG, 80GGA, 80GGC
  • 80E, 80EE, 80EEA, 80EEB
  • Deduction under section 80D, 80DD, 80DDB
  • 80IA, 80-IAB, 80-IAC, 80-IB, 80-IB
  • These deductions won’t be entertained under the new tax regime.

So, you will not gain from the new regime if you the tax exemptions & deductions that you are claiming in a year more than Rs. 2.5 lakhs that applies to income group above Rs.15 lakhs. If your NPS contribution/HRA exemption/ housing loan interest claims are more than Rs. 50,000 then sticking to the old regime would be beneficial for you. Basically, the higher the investments, and exemptions apart from the standard deduction, the better it is to stick to the old tax regime.

However, as per the financial minister, a taxpayer with an annual income of Rs. 15 lakhs can save Rs. 78,000 under the new tax regime.  But if you are the saving kind then do stick to the old tax regime.

Takeaway

Theoretically, the new tax regime might be offering lower tax rates and lesser complications but taking into consideration the overall tax benefits that one can avail under the available exemptions and deductions, the new tax regime doesn’t seem to promise as one would end up paying a higher tax amount. Well, the choice remains subjective here.  

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