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Old Regime Vs New Regime
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Old Regime for FY 2019-2020 | You can choose between Old Regime/New Regime for FY 2020-2021
NEW REGIME vs OLD REGIME
Which one to Choose?
In a bid to simply your tax concerns, we have your back.
The introduction of two regimes of computing tax liability for individuals has left the assessees in awe, more popularly known as the Old Tax Regime and the New Tax Regime. The new regime is all set to come into effect from the assessment year 2021-22 onwards.
Let’s have a look at what these 2 tax regimes are:
NEW REGIME- Lower Tax Rates, No Deductions
The new tax regime has all that you could have wished for: more tax slabs and lesser tax rates.
Total Income | Tax Rates |
|---|---|
0 - 3,00,000 | Nil |
3,00,001 - 6,00,000 | 5% |
6,00,001 - 9,00,000 | 10% |
9,00,001 - 12,00,000 | 15% |
12,00,001 - 15,00,000 | 20% |
| Above 15,00,000 | 30% |
But wait, here’s the catch, although the table might look pleasing but to avail the new tax regime, you will have to forego all your tax exemptions and deductions which you have been claiming to decrease your overall tax liability.
Exemptions/Deductions which cannot be claimed under the New Regime:
If you decide to opt for the New Tax Regime, you won’t be able to claim the following deduction and exemptions:
- Leave Travel Allowance (LTA)
- House Rent Allowance (HRA)
- Life Insurance Premium
- Standard Deduction of Rs. 50,000 from salary income
- Entertainment Allowance
- Professional Tax Paid
- Investment in NPS
- Interest on Saving Account
- Interest on Housing Loan
- Additional Depreciation (in case of businesses)
- Family Pension Deduction of Rs. 15,000
- All deductions under Chapter VI-A (Life Insurance, PPF, ELSS)
- Medical Insurance Premium
- Donations under 80G
- Other deductions as mentioned in Chapter VI-A
However, there are four deductions available even if the assessee opts for new regime. These are:
- Standard deduction of Rs. 50,000 on salary income
- Family pension of up to Rs. 15,000 or 1/3rd of pension, whichever is lower
- Section 80CCD- Employer’s contribution to EPS (Employees’ Pension Scheme) and
- Section 80JJAA- Deduction in respect of employment of new employee
OLD REGIME- High Tax Rates, More Tax Planning
Under the existing tax regime, although the rates are comparatively high, you have the scope of tax planning to optimise your taxable income. The existing tax rates are:
| Total Income | Tax Rates |
|---|---|
| 0 – 2,50,000 | Nil |
| 2,50,001 – 5,00,000 | 5% |
| 5,00,001 – 10,00,000 | 20% |
| Above 10,00,000 | 30% |
Which regime to opt for?
Let’s understand this by way of an example!
Suppose Mr. A has an annual income of Rs. 10,00,000. He gets HRA i.e. House rent allowance of Rs. 50,000. He has invested Rs. 1,00,000 in PPF. Medical Insurance Premium is Rs. 8,000.
Tax Liability under New Regime:
| Income | Tax Rate | Tax Amount |
|---|---|---|
| 0 – 2,50,000 | Nil | Nil |
| 2,50,001 – 5,00,000 | 5% | 12,500 |
| 5,00,001 – 7,50,000 | 10% | 25,000 |
| 7,50,001 – 10,00,000 | 15% | 37,500 |
Total Tax Liability (excluding Cess i.e. 4% of Total Tax) | 75,000 |
Tax Liability under Old Regime:
| Gross Total Income | 10,00,000 | |
|---|---|---|
| Standard Deduction | 50,000 | |
| HRA | 50,000 | |
| 80C Deduction | 1,00,000 | |
| 80D Deduction | 8,000 | |
| Total Deduction | 2,08,000 | |
| Taxable Income | 7,92,000 |
| Income | Tax Rate | Tax Amount |
|---|---|---|
| 0 – 2,50,000 | Nil | Nil |
| 2,50,001 – 5,00,000 | 5% | 12,500 |
| 5,00,001 – 10,00,000 | 20% | 58,400 |
Total Tax Liability (excluding Cess i.e. 4% of Total Tax) | 70,900 |
Hence, we can clearly understand that the tax liability of Mr. A is less if he opts for Old Regime on account of the deductions claimed.
However, this certainly does not mean that the tax liability will always be less for Old Tax Regime when claiming deductions. Before making the choice of regime, it is important that prior tax calculations be made.
Let’s understand this by way of another example:
| Mr. A | Mr. B | Mr. C | |
|---|---|---|---|
| Annual Income | 12,00,000 | 12,00,000 | 12,00,000 |
| Deductions: | Low Deductions | Moderate Deductions | High Deductions |
| Standard Deduction | 50,000 | 50,000 | 50,000 |
| PPF/ELSS (80 C) | - | 1,00,000 | 1,50,000 |
| NPS 80CCD (1B) | 50,000 | ||
| Medical Premium (80D) | - | - | 20,000 |
| HRA | 60,000 | ||
| Total Taxable Income | 11,50,000 | 10,50,000 | 8,70,000 |
| Tax under Old Regime | Rates | Mr. A | Mr. B | Mr. C |
|---|---|---|---|---|
| 0 - 2,50,000 | Nil | 0 | 0 | 0 |
| 2,50,001 - 5,00,000 | 5% | 12,500 | 12,500 | 12,500 |
| 5,00,001 - 10,00,000 | 20% | 1,00,000 | 1,00,000 | 74,000 |
| Above 10,00,000 | 30% | 45,000 | 15,000 | - |
Tax Liability (excluding Cess i.e. 4% of Total Tax) | 1,57,500 | 1,27,500 | 86,500 |
| Tax under New Regime (no deduction to be claimed) | Rates | Mr. A | Mr. B | Mr. C |
|---|---|---|---|---|
| 0 - 2,50,000 | Nil | 0 | 0 | 0 |
| 2,50,001 - 5,00,000 | 5% | 12,500 | 12,500 | 12,500 |
| 5,00,001 - 7,50,000 | 10% | 25,000 | 25,000 | 25,000 |
| 7,50,001 - 10,00,000 | 15% | 37,500 | 37,500 | 37,500 |
| 10,00,001 - 12,50,000 | 20% | 50,000 | 50,000 | 50,000 |
| 12,50,001 - 15,00,000 | 25% | - | - | - |
| Above 15,00,000 | 30% | - | - | - |
Tax Liability (excluding Cess i.e. 4% of Total Tax) | 1,25,000 | 1,25,000 | 1,25,000 |
| Regime to be opted | New | New | Old |
|---|---|---|---|
| Tax Saved | 32,500 | 2,500 | 38,500 |
Conclusions:
- So, the table clearly shows that the assessees earning between 10-15 lakhs p.a should opt for the old regime if they are willing to claim a deduction in the range of 2-3 lakhs.
- If you are claiming deduction less than that, then you are better off in the new scheme. Obviously, the facts that you are earning interest on the invested amount and have social security have to be considered when deciding on the appropriate scheme.
- If considering the cash outflows only, the new regime puts more money in the hands of the assessees.
- Both the Old and the New Regimes have their own pros and cons. One offers the scope of tax planning but higher tax rates while one disallows all the deductions and exemptions but lesser tax rates.
Clearly, if you do not have any deduction to claim, then you are better off in the New Regime. But, this may not be practical as every assessee would have some or the other deduction to avail.
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