The Income Tax Act of India offers two options for taxpayers to choose their tax regime: the old tax regime and the new tax regime. The old tax regime allows taxpayers to claim various deductions and exemptions under various sections of the Act, such as Section 80C, Section 80D, Section 24, etc. The new tax regime, introduced in Budget 2020, offers lower tax rates but with minimal deductions and exemptions. The choice of tax regime depends on the income level, investment pattern and tax planning of the taxpayer. In this blog post, we will compare the old tax regime with the new tax regime and help you decide which one is better for you.
Tax Rates Under Old and New Tax Regime
The first thing to compare between the old and new tax regime is the tax rates applicable for different income slabs. The table below shows the comparison of tax rates under both regimes for individuals below 60 years of age :
Income Slab | Old Tax Regime | New Tax Regime
------------|----------------|---------------
Up to ₹2.5 lakh | Nil | Nil
₹2.5 lakh to ₹5 lakh | 5% | 5%
₹5 lakh to ₹7.5 lakh | 20% | 10%
₹7.5 lakh to ₹10 lakh | 20% | 15%
₹10 lakh to ₹12.5 lakh | 30% | 20%
₹12.5 lakh to ₹15 lakh | 30% | 25%
Above ₹15 lakh | 30% | 30%
As you can see, the new tax regime offers lower tax rates for most income slabs, except for the lowest one. However, this does not mean that the new tax regime is always better than the old one. There are other factors to consider, such as deductions and exemptions.
Deductions and Exemptions Under Old and New Tax Regime
The old tax regime allows taxpayers to claim various deductions and exemptions under various sections of the Income Tax Act, such as:
- Section 80C: Deduction of up to ₹1.5 lakh for investments in specified instruments such as PPF, ELSS, NSC, etc.
- Section 80D: Deduction of up to ₹25,000 for health insurance premium paid for self and family (₹50,000 for senior citizens)
- Section 80TTA: Deduction of up to ₹10,000 for interest income from savings account
- Section 24: Deduction of up to ₹2 lakh for interest paid on home loan
- Section 80EEA: Additional deduction of up to ₹1.5 lakh for interest paid on home loan for affordable housing
- Section 80G: Deduction for donations made to specified funds and institutions
- Standard Deduction: Deduction of ₹50,000 for salaried individuals
- HRA: Exemption for house rent allowance received from employer
- LTA: Exemption for leave travel allowance received from employer
The new tax regime, on the other hand, offers minimal deductions and exemptions. The only deductions allowed under the new tax regime are:
- Section 80CCD(2): Deduction for employer's contribution to NPS up to 10% of salary
- Section 80JJAA: Deduction for employment of new employees
- Section 80LA: Deduction for income of certain offshore banking units and international financial services centre
The only exemptions allowed under the new tax regime are:
- Transport allowance granted to a divyang employee (up to ₹3,200 per month)
- Conveyance allowance received to meet the expenditure on conveyance in performance of duties (up to ₹1,600 per month)
- Any allowance granted to meet the cost of travel on tour or on transfer
- Daily allowance received to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty
As you can see, the new tax regime does not allow most of the common deductions and exemptions that taxpayers claim under the old tax regime. This means that the taxable income under the new tax regime will be higher than that under the old tax regime for most taxpayers.
Which Tax Regime is Better?
The answer to this question depends on your income level, investment pattern and tax planning. Generally speaking, if you have a low income and do not claim many deductions and exemptions, you may benefit from the lower tax rates under the new tax regime. However, if you have a high income and claim many deductions and exemptions, you may benefit from the higher tax rates but lower taxable income under the old tax regime.
To illustrate this, let us take an example of an individual with a gross income of ₹15 lakh and the following deductions and exemptions under the old tax regime:
- Section 80C: ₹1.5 lakh
- Section 80D: ₹25,000
- Section 80TTA: ₹10,000
- Section 24: ₹2 lakh
- Standard Deduction: ₹50,000
- HRA: ₹1.2 lakh
The table below shows the comparison of tax liability under both regimes for this individual:
Tax Regime | Taxable Income | Tax Liability
-----------|----------------|--------------
Old | ₹9.15 lakh | ₹93,400
New | ₹15 lakh | ₹1.95 lakh
As you can see, the old tax regime is better for this individual as he/she can save ₹1.01 lakh in taxes by claiming various deductions and exemptions.
However, if the same individual does not claim any deductions and exemptions under the old tax regime, the table below shows the comparison of tax liability under both regimes:
Tax Regime | Taxable Income | Tax Liability
-----------|----------------|--------------
Old | ₹14.5 lakh | ₹2.73 lakh
New | ₹15 lakh | ₹1.95 lakh
As you can see, the new tax regime is better for this individual as he/she can save ₹78,000 in taxes by opting for the lower tax rates.
Therefore, it is advisable to compare both regimes and choose the one that suits your income level, investment pattern and tax planning. You can use online tools such as Income and Tax Calculator to compare both regimes and calculate your tax liability.
Conclusion
The choice of tax regime is an important decision that can affect your tax liability and savings. The old tax regime offers higher tax rates but more deductions and exemptions, while the new tax regime offers lower tax rates but minimal deductions and exemptions. The best tax regime for you depends on your income level, investment pattern and tax planning. You should compare both regimes and choose the one that maximizes your savings and minimizes your taxes.
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