A detailed analysis of the new tax regime and what it means for you
The Union Budget announced on 1st February 2020 for the first time has given the taxpayers an option to choose how much tax they would want to pay. This means, you as a taxpayer can choose to invest and pay tax on a reduced income, or, not invest and pay a lower tax on your actual income. Thus, the onus of choice is on the taxpayer. Here are a few pointers that will help you make your choice.
Please note: These changes are applicable for the financial year 2020-2021. Here financial year means, the period between April 1, 2020, to March 31, 2021.
New Tax Rules
As per the new optional income tax regime, the revised tax rates for the new income slabs are:
A taxpayer can opt to pay tax at these slashed rates if they are ready to forgo deductions like:
However, deduction under sub-section (2) of section 80CCD (employer contribution on account of the employee in notified pension scheme) and section 80JJAA (for new employment) can still be claimed
Furthermore, the following allowances are still available under the new tax regime:
However, like in the old tax regime, a taxpayer can claim the rebate u/s 87A (up to Rs. 12,500) if his/her annual income is less than Rs. 5,00,000. That means if you are a taxpayer with income less than or equal to Rs. 5,00,000, it doesn’t matter which tax regime you choose. As per the old and new tax rates, your tax payable will be ‘0’ (See calculations below).To add, gifts received from the employer up to Rs. 5,000 continue to remain exempt under both - new and existing tax regimes.
Old tax rules
Keeping human behavior of resistance for change in mind, the Finance Minister has given an option to every taxpayer to opt for getting taxed at the old tax rates. The tax rates applicable for a taxpayer less than 60 years of age are:
Though these optional tax rates are higher than those proposed in Budget 2020, the taxpayer can claim various deductions and get exemptions here. Most common being the HRA, standard deduction, Chapter VI A deductions, tax-free perquisites, and more. As such, a taxpayer may still pay lower taxes under the present tax rate structure by availing several tax benefits available under the Income Tax Act, but not available under the new tax regime as discussed above.
A regular salaried employee not receiving HRA can reduce his/her total taxable income by Rs.3,61,400 as follows:
*Tax-free perquisite - Food and beverage: Assuming a 22 day month, and 2 meals a day
Comparison between the old and the new tax regime for salaried individuals
Based on the above pointers here are few comparisons to understand the effect of the tax regime better:
Profile 1 - You are a salaried individual having no investments and are not claiming HRA or any deductions.
- Exemption in respect of Leave Travel concession
- Exemption in respect of House Rent Allowance
- Prescribed Exempt Allowances u/s 10(14)
- Allowances exempt to MPs/MLAs u/s 10(17)
- Exemption in respect of the income of minor
- Standard deduction of Rs. 50,000
- Entertainment Allowance
- Deduction towards Professional Tax
- Loss under the head income from house property for the rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law
- Deduction in respect of interest on housing loan in respect of self-occupied house
- Deduction towards family pension
- Exemption in respect of free food and beverage through vouchers provided to the employee
- Any deduction under chapter VIA - This includes the deductions for life insurance premium paid, provident fund contributions, investments in tax saving mutual funds, interest on education loan, principal amount paid on housing loan, donations, house rent paid when HRA is not available, medical insurance premium paid and more.
- Transport Allowance granted to a divyang (person with a disability) employee to meet the expenditure for the purpose of commuting between place of residence and place of duty
- Conveyance Allowance granted to meet the expenditure on the commute for official work/duties
- Any Allowance granted to meet the cost of travel on tour or on transfer
- Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his/her normal place of duty
As mentioned earlier, if your income is Rs. 5,00,000 or less, your choice of the tax regime doesn’t matter. In fact, the availability of standard deduction of Rs. 50,000 for all the salaried taxpayers under the existing tax regime can help them still pay zero tax with the salary income of Rs. 5,50,000. As per the tax calculations, the break-even point for such salaried taxpayers would be a total income of Rs. 6 lakh, wherein the total tax payable by the taxpayers would be the same. If the income is less than that, the taxpayer can end up paying lower tax under the existing rate structure, whereas one can be benefited under the new tax regime, if the income is more than Rs. 6 lakh. (See calculations)
Please note: If you do not have business income, you can make a choice between the old tax regime and new tax regime every year.
Profile 2 - You are a salaried individual having no investments but are claiming HRA
The old tax regime may help you save more tax, if you are living in rented premises and claim HRA exemption as well along with standard deduction.
*Here HRA is calculated at 40% of the half of basic pay. Basic pay is taken as 50% of the gross salary.
Profile 3 - You are a salaried individual investing or claiming deductions of a minimum of Rs. 1,50,000 every year
In this case, the old tax regime is best suitable. However, if you are earning anything more than Rs. 12,25,000 deductions of just Rs. 1,50,000 won’t help. However, if the individual makes an additional deduction of Rs. 50,000, the individual is always benefited under the old tax regime. (See calculations)
Profile 4 - Minimum investments/deductions needed to save tax
(When we say investments and deductions, this can be divided between, HRA, tax-free perquisites, deductions under chapter VIA - LIC, investments in tax-free avenues, interests and principal of house loan, interest on education loan and more. This is possible only under the old regime.)
*Please note: These figures are illustrative and not any advice.
Analysis - When should you switch to the new tax regime and when not
The analysis here is simple. Our experts say, if you are a salaried individual and have a minimum of the above-mentioned deductions/investments in your kitty to claim, the old tax regime is a better choice for you. Moreover, you can also discuss with your employer/HR to structure your salary with tax-free perquisites to help you save more on taxes. Usually, at the beginning of the financial year itself, one would know the basic deductions he/she can claim, tax-free perquisites available and then, plan his/her investments wisely.
Furthermore, opting in for the new tax regime can be done anytime before filing the income tax return. So, calculate and choose wisely. Need help to calculate your tax under both regimes?
Try our interactive sheet here.
Happy saving and try investing!
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