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The Indian income tax system levies tax on individual tax payers depending on our income level. From the financial year 2020-21, the method of levying taxes changed. A new tax regime was announced wherein the tax rates were reduced quite significantly along with a huge reduction in tax saving opportunities as well.

Old vs new tax regime which is better? Let’s read on to find out more as the case may be different for different income slabs.

In the blog, we will first learn about the difference between the tax rates of both the regimes, difference in the deductions available and practical examples of how the new regime will make a difference for each tax slab.

Old vs New: A Comparison For Different Slabs

Taxpayers with annual income between RS.5 lakhs to Rs.10 lakhs are taxed at 20%, under the old regime. And in the new regime, they will be taxed at half that rate i.e. 10%. Also, those with an annual income of Rs.7.5 lakhs to Rs.10 lakhs will have to pay a 15% income tax.

However, if the taxpayer gets old tax regime benefits from exemptions and his/her net tax payable is less, he/she can choose to continue with the old tax regime.

Let’s look at the old and new tax slabs for persons aged below 60 years of age.

Old vs New Tax Regime

Income tax slab for FY 2020-21 old regime Annual Income New Regime FY 2020-21
Nil Up to Rs.2.5 lakhs Nil
5% Rs.2.5 – 5 lakh 5%
20% Rs.5 – 7.5 lakh 10%
Rs. 7.5 – 10 lakh 15%
30% Rs. 10-12.5 lakh 20%
Rs. 12.5-15 lakh 25%
Rs. 15 and above 30%

Which Exemptions And Deductions Are Allowed And Which Have Been Removed? 

Exemptions mean the taxpayer is free from the tax burden on certain incomes. For example, you do not have to pay tax on income from agriculture. 

Deduction means removing certain investments and expenditures the taxpayer makes and then calculating the gross income. For example, if you pay Rs. 20,000 as a health insurance premium, you can deduct this amount from your total income.

In the ‘old tax regime,’ there are 120 exemptions. Taxpayers do not benefit from all of them. Most of them complicate the direct tax system. After a thorough study, the Ministry of Finance has removed around 70 exemptions. Old vs new tax regime for salaried employees is a new change. Let’s view all deductions and exemptions that are available in each of the two regimes.

List of a few exemptions and deductions in old tax regime slabs (not allowed in the new regime)

Here’s the list (not exhaustive) of exemptions:

  • Leave Travel Allowance 
  • House rent allowance
  • Standard deduction of Rs 50,000 that was available for salaried individuals
  • Deductions available under Section 80TTA/TTB ( on interest from savings account deposits )
  • Entertainment allowance deduction and professional tax ( For government employees)
  • Tax relief on interest paid on home loan for self-occupied or vacant property u/s 24
  • Deduction of Rs 15000 allowed from family pension under clause (iia) ( Section 57)
  • Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) (Except, deduction under Section 80CCD(2)—employers contribution to NPS, and Section 80JJA) and so on. These popular tax saving investment options include ELSS, NPS, PPF, tax break on insurance premium among others. 

One can still claim deduction under sub-section ( 2) of section 80CCD which is basically an employer’s contribution towards employee’s account in NPS and section 80JJAA ( for new employment). Also note that if the employee’s contribution to EPF and NPS exceeds more than Rs 7.5 Lakh, in the financial year in question, then the employee is liable to pay tax. 

List of important exemptions retained in the new tax regime 2021-22 (assessment year)

  • Income from Life Insurance,
  • Agricultural Income,
  • Standard reduction on rent,
  • Retrenchment compensation,
  • Leave encashment on retirement,
  • VRS proceeds up to Rs 5 lakhs,
  • Death cum retirement benefit,
  • Money received as a scholarship for education, etc.

Practical Examples of Impact of Old vs New Tax Regime Slabs

Old vs New Tax Regime: For Annual Income Up To Rs 7.5 Lakhs

Annual Income of Rs.7,50,000 (without exemption)
  Old Regime New Regime
Income tax slab Tax Rate Tax (Rs.) Tax Rate Tax (Rs.)
Up to Rs. 2,50,000 0 0 0 0
250001 – 500000 5 12500 5 12500
500001 – 750000 20 50000 10 25000
Sum   62500   37500
Health and Education cess 4 2500 4 1500
Tax Payable   65000   39000

 

Annual Income of Rs.7,50,000 (with exemption)
Annual Income 750000  
Exemptions u/s 80C -150000
u/s 80CCD(1B) -50000
u/s 80D -50000
HRA -10000
Taxable Income 4,90,000
 
  Old Regime New Regime
Income tax slab Tax Rate Tax (Rs.) Tax Rate Tax (Rs.)
Up to Rs.2,50,000 0 0 0 0
250001 – 500000 5 12500 5 12500
500001 – 750000 0 0 10 25000
(-) Rebate   -12500    
Sum   0   37500
health and education cess 4 0 4 1500
Tax Payable   0   39000

Old vs New Tax Regime: For annual income Up to Rs.10 Lakhs

Annual Income of Rs.10,00,000 (without exemption)
  Old Regime New Regime
Income tax slab Tax Rate Tax (Rs.) Tax Rate Tax (Rs.)
Up to Rs.2,50,000 0 0 0 0
250001 – 500000 5 12500 5 12500
500001 – 750000 20 50000 10 25000
750001 – 1000000 20 50000 15 37500
Sum   112500   75000
Health and education cess 4 4500 4 3000
Tax Payable   1,17,000   78,000

 

Annual Income of Rs.10,00,000 (with exemption)
Annual Income 10,00,000  
Exemptions u/s 80C -1,50,000
u/s 80CCD(1B) -50,000
u/s 80D -75,000
Taxable Income 7,25,000
  Old Regime New Regime
Income tax slab Tax Rate Tax (Rs.) Tax Rate Tax (Rs.)
Up to Rs.2,50,000 0 0 0 0
250001 – 500000 5 12500 5 12500
500001 – 750000 20 50000 10 25000
750001 – 1000000 0 0 15 37500
Sum   62500   75000
health and education cess 4 2500 4 3000
Tax Payable   65,000   78,000

Old vs New Tax regime: For annual income up to Rs 12.5 Lakhs

Annual Income of Rs.12,50,000 (without exemption)
  Old Regime New Regime
Income tax slab Tax Rate Tax (Rs.) Tax Rate Tax (Rs.)
Up to Rs.2,50,000 0 0 0 0
250001 – 500000 5 12500 5 12500
500001 – 750000 20 50000 10 25000
750001 – 1000000 20 50000 15 37500
1000001 – 1250000 30 75000 20 50000
         
Sum   187500   125000
Health and education cess 4 7500 4 5000
    195000   130000

 

Annual Income of Rs.12,50,000 (with exemption)
Annual Income 1250000  
Exemptions u/s 80C -150000
u/s 80CCD(1B) -50000
u/s 80D -75000
Taxable Income -975000
         
  Old Regime New Regime
Income tax slab Tax Rate Tax (Rs.) Tax Rate Tax (Rs.)
Up to Rs.2,50,000 0 0 0 0
250001 – 500000 5 12500 5 12500
500001 – 750000 20 50000 10 25000
750001 – 1000000 20 50000 15 37500
1000001 – 1250000 0 0 20 50000
Sum   112500   125000
Health and education cess 4 4500 4 5000
Tax Payable   117000   130000

Old vs New Tax Regime: For annual income up to Rs 15 Lakhs

Annual Income of Rs.15,00,000 (without exemption)
  Old Regime New Regime
Income tax slab Tax Rate Tax (Rs.) Tax Rate Tax (Rs.)
Up to Rs.2,50,000 0 0 0 0
250001 – 500000 5 12500 5 12500
500001 – 750000 20 50000 10 25000
750001 – 1000000 20 50000 15 37500
1000001 – 1250000 30 75000 20 50000
1250001 – 1500000 30 75000 25 62500
Sum   262500   187500
Health and education cess 4 10500 4 7500
    273000   195000
Annual Income of Rs.15,00,000 (with exemption)
Annual Income   1500000  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exemptions u/s 80C -150000
u/s 80CCD(1B) -50000
u/s 80D -75000
Taxable Income -1225000
 
  Old Regime New Regime
Income tax slab Tax Rate Tax (Rs.) Tax Rate Tax (Rs.)
Up to Rs.2,50,000 0 0 0 0
250001 – 500000 5 12500 5 12500
500001 – 750000 20 50000 10 25000
750001 – 1000000 20 50000 15 37500
1000001 – 1250000 30 75000 20 50000
1250001 – 1500000 0 0 25 62500
Sum   187500   187500
Health and education cess 4 7500 4 7500
Tax payable   1,95,000   1,95,000

Income tax old vs new tax regime: which scheme is more beneficial

Both systems have their own sets of pros and cons. The old system has many exemptions and deductions under numerous sections – availing a few of these required people to invest in tax saving investment options, which helped inculcate a good habit of investing. On the other hand, the new system gives people more flexibility and tries to simplify the process.

It also varies based on which slab you are in as well. However, since the system is new, it makes sense to consult a competent tax expert who can suggest the optimal tax saving route for you.

Finance Minister Nirmala Sitharaman in her budget has said that gradually the exemptions and deductions will be reviewed and reduced in number as the government wants a simple Income tax system in the country. Whether or not the new system is received well after we compare old vs new tax regime in the upcoming financial year, will say a lot about the tax laws that may get implemented in the future. 

Happy Investing! 

Disclaimer: The views expressed in this post are that of the author and not those of Groww.

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