New Tax Regime vs Old Tax Regime: Which Suits Your Needs?
The Budget of 2020 brought quite a few changes to our tax system. The most prominent change was the introduction of the New Tax Regime. However, this New Tax System was optional. But, many taxpayers were still confused as to which system they should follow.
The Central government introduced a new personal income tax regime for the taxpayers in the Union Budget 2020. On one side, this new system comes with lower slab rates, and on the other, it eradicates particular deductions and claims. The other point regarding this new tax regime is that it’s optional. This proposes that you do not need to forcibly select this system of taxation. You can choose to continue with the old method, in which you can claim all the accessible deductions and exemptions amalgamated with tax-saving investments.
So, are you confused between the old tax regime and the new tax regime? Are you still following the old tax regime, and are you still not clear about the new system? Is the newly introduced Tax-system more beneficial for you?
If you are facing the above problems and are questioning which method of taxation to pick, you’re not the only one. With the tax filing season going on, many salaried employees and self-employed professionals are confronted with the same worries.
To sort this indecision, let’s understand these two methods of taxation.
 WHAT IS NEW TAX REGIME?
Under new tax regime, tax has been significantly reduced by forgoing certain exemptions and deductions. The rates of tax, amount of tax and savings under new and old regime are as follows-
a) If Popular deduction of Rs.1,50,000/- is not claimed by individual u/s 80C
Total Income and Taxable Income (In lakhs) | Old Tax Rate | New Tax Rate | Tax at Old Rates (Including Cess @4% | Tax at New Rates (Including Cess@4%) | Savings in new tax regime |
0-2,50,000 | - | - | - | ​ | ​ |
2,50,000-5,00,000 | 5% | 5% | No tax because of Rebate u/s 87A | ​ | ​ |
5,00,000-7,50,000 | 20% | 10% | 65000 | 39000 | 26000 |
7,50,000-10,00,000 | 20% | 15% | 117000 | 78000 | 39000 |
10,00,000-12,50,000 | 30% | 20% | 195000 | 130000 | 65000 |
12,50,000-15,00,000 | 30% | 25% | 273000 | 195000 | 78000 |
Above 15,00,000 | 30% | 30% | Calculated Accordingly | ​ | ​ |
b) If Popular deduction of Rs.1,50,000/- is claimed by individual u/s 80C but have to forgo if he opts new regime, then savings in tax is-
Total Income (In lakhs) | ​Deduction u/s 80C | Taxable Income | Tax at Old Rates (Including Cess @4% | Tax at New Rates (Including Cess@4%) | Savings in New Tax regime |
2,50,000 | 1,50,000 | 1,00,000 | ​ | ​ | ​ |
5,00,000 | 1,50,000 | 3,50,000 | No tax because of Rebate u/s 87A | ​ | ​ |
​7,50,000 | 1,50,000 | 6,00,000 | 33,800 | 23,400 | 10,400 |
10,00,000 | 1,50,000 | 8,50,000​ | 85,800 | ​54,600 | ​31,200 |
12,50,000 | 1,50,000 | 11,00,000 | 1,48,200 | 98,800 | ​49,400 |
15,00,000 | 1,50,000 | 13,50,000 | 2,26,200 | 1,56,000 | ​70,200 |
Above 15,00,000 | ​ | ​ | Calculated Accordingly | ​ | ​ |
There is savings in tax if you opt new tax regime even when you forgo deductions allowed u/s 80C. But there are many more deductions and exemptions claimed by taxpayer and answer may not be positive every time.
IS NEW TAX REGIME OPTIONAL OR MANDATORY–
1. OPTIONAL- New tax regime is optional. Individual and HUF can opt for new tax regime as per their wish every year.
2. ONCE WITHDRAWN CANNOT OPT IN SUBSEQUENT YEARS FOR BUSINESS INCOME - But for Individuals and HUF who has business income they are allowed to decide in F.Y.2020-21 whether to opt for new tax regime or not. Once he opts for new tax regime then he can withdraw next year and then in subsequent years he will not be allowed to enter into new tax regime.
DEDUCTIONS AND EXEMPTIONS NOT TO BE CLAIMED IN NEW TAX REGIME
1. Standard Deduction, Entertainment Allowance and Professional Tax
2. Leave Travel Allowance
3. House Rent Allowance
4. Exemption u/s 10(14) i.e. Helper Allowance, Uniform allowance, etc.
5. Exemption of Rs.1500/- in case of clubbing of minor child income
6. Exemption for newly established units in Special Economic Zones
7. Interest paid on Home loan
8. Deduction under Chapter VIA i.e. All of the deduction claimed u/s 80C, 80CCC, 80D, 80DD, etc except 80JJA(for new employment) and 80CCD(2) i.e. employer contribution on account of employee in notified pension scheme.
9. Allowance to MP and MLA
10. Additional Depreciation
11. Deduction from Family Pension
12. Donations for Scientific research
13. Deduction given to promote business in backward areas, tea coffee rubber business and business engaged in production of petroleum and natural gas.
14. Deduction given for investment made in specified business i.e. cold Storage, Hospitals, Hotels, etc.
15. Deduction of expenditure incurred on Agricultural extension project notified by board.
DEDUCTIONS AND EXEMPTIONS ALLOWED IN NEW TAX REGIME
1. Transport Allowance granted to Divyang Employee
2. Conveyance allowance granted to meet expenditure on conveyance in performance of duties.
3. Any allowance granted to meet cost of travel on tour or travel.
4. Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.
 
 ARE LOSSES ALLOWED TO BE SET OFF AND CARRY FORWARD
1. 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 not available under the new regime to the extent they relate to deductions/exemptions withdrawn.
2. Losses under head Income from House Property cannot be set off with any other head of income.
 WHICH TAX REGIME TO OPT?
The new tax rates may be perhaps lower in some cases. So, subject to your income level, you could be charged a lower rate as per the new tax regime. For example, say your total taxable income is Rs. 7,50,000. So as per the old method, your tax rate is 20%. Whereas, as per the new tax rates, it’s only 10%. This shows you that you should opt for the new income tax regime if the rates in that come out to be lower, so your tax liability is maximized.
Moreover, since the new tax regime does not permit any deductions in tax, a person with less tax-saving investments may get more benefits from the new tax rates. You can adopt this tax rate if your income is high, and your tax liability is low in the new tax regime as compared to the old tax regime.
THE 20% FORMULA:
Bank Bazaar CEO Adhil Shetty has shared the 20% formula which can help taxpayers decide on which regime to choose. As per the formula. if you can claim a deduction of 20% on your income, you are better off remaining in the old regime. In order to decide, first, you must have an estimate for the income you hope to generate in the financial year from various sources such as salary, business income, capital gains from investments, interest from bank deposits etc. The next step is to take stock of all available deductions.
You can legally avoid taxes through qualified investment, insurance and expenditure. For example, PPF investments up to Rs 1.5 lakh are qualified for tax-saving investments. Life and health insurance premium also qualify for deductions. Expenses such as children’s school tuition fee, rent paid, and certain healthcare expenses all help reduce your taxable income. There’s also the standard deduction of Rs 50,000 for salaried individuals.
The next step is to apply the formula. Do your total deductions add up to 20% of your gross income? Let’s say your income is expected to be Rs 7.5 lakh. So do your various deductions add up to Rs 1.5 lakh? If so, it’s quite likely that you have enough deductions to benefit by remaining in the old regime because your taxable income will be lower.
To understand better, let’s take for instance income of Rs. 7.5 lakh. If your taxes under the old regime were Rs 65,000 assuming no deductions, in the new regime, your taxes on the same income reduce to Rs 39,000. But in the old regime, if you had claimed deductions of Rs 1.5 lakh, your taxes would be the lowest at Rs 33,800. 
Remember that Income tax deduction limits favour those in lower-income brackets. For those in large incomes, the formula may not help. For example, someone with a salary of Rs. 35 lakh will find it difficult to claim deductions of Rs 7 lakh, and therefore will not achieve 20% deductions. But people whose incomes are between Rs 5 lakh and up to around Rs 20 lakh can claim 20% deductions through smart financial planning. Those in lower-income brackets – Rs 12 lakh or lower – 20% deductions can be easily availed through deductions in Sections 80C and 80D alone.
 
OUR COMMENTS-
Before you select between the two methods of taxation, evaluate your alternatives prudently and make use of online tax calculators to decide your tax liability under each method. If you have some amount of your savings open for investments, you can choose for tax-saving investments to further decrease your tax liability in the old tax regime.
Before selecting from among the old and new system, it benefits to follow some bits of advice and keep some ideas in mind. Here are some suggestions to help you make a choice:
 
·  Recognize the deductions and exemptions accessible to you.
·  Ascertain your total taxable income before and after deductions and assess the tax liabilities in the old and the new regimes.
·  If your liability comes the same in both the regimes, maybe you could get more benefit from the old system, which permits exemptions and deductions.
·  Furthermore, consider your long-term goals and strategize your investments suitably. Keep in mind that it’s not judicious to avoid investing in tax-saving options just because you’re picking the new scheme.
 
How to Opt for New Tax Regime? You will have to fill this additional form:
The Central Board of Direct Taxes (CBDT), via a notification dated October 1, 2020, has clarified that individuals opting for the new tax regime for FY 2020-21 will have to do so by filling and filing a new form, called Form 10-IE. The new form i.e. Form 10-IE has been notified by the government. An individual is required to fill and submit this form at the time of filing income tax return (ITR) if he/she opts for the new tax regime for a particular financial year.
 
Information required in the form:
In the notified form, the individual is required to mention the following information:
a) Name of the individual/HUF
b) Address
c) PAN
d) The financial year for which option is exercised
e) If the individual/HUF has income under business or profession
f) Date of birth
g) Nature of business/profession, (mandatory if an individual is having income from business and profession)
Remember individuals having business income are required to fill this form twice - first at the time of opting for the new tax regime and secondly at the time of withdrawing this option. Salaried individuals with no business income will have to fill the form only if they opt for the new tax regime. In the future, if they do not opt for the new tax regime for a particular financial year then they will not be required to fill the form.
We hope you will find the above article useful in deciding the suitable tax regime for you. In case you face any difficulty, you may contact us for any support. We will be happy to help you.