The new tax regime introduced in the Union Budget 2020 has confused many taxpayers. A lot of them are facing a dilemma while selecting between the old and the new tax regime.
In this article, we will discuss both the tax regimes and their benefits.
The finance minister, Nirmala Sitharaman, introduced a new tax regime in the Union Budget 2020. The minister added more tax slabs as well as lowered the tax rates. However, in order to pay tax as per the new tax regime, an individual will have to forgo most of the exemptions and deductions. But people who want to claim exemptions and deductions can pay tax as per the old tax regime.
Citizens are allowed to choose between the two regimes. Hence, they can select a tax regime that provides them with more benefits.
Let’s take a look at both the tax regimes in detail-
Old Tax Regime
While the tax rates in the old tax regime are high, individuals can claim various exemptions and deductions to lower their tax liability.
There are several exemption and deduction options available to citizens. By opting for these options, a taxpayer can lower his/her taxable income. Therefore, he/she will be able to save taxes.
New Tax Regime
In the new tax regime, the tax rates are lower. Also, the income tax slab has increased. However, one crucial factor to keep in mind about this regime is that a taxpayer can’t claim exemptions and deductions.
Some of the main exemptions and deductions that individuals will have to let go are standard deduction, Section 80C deduction, Section 80D deduction, house rent allowance (HRA), and leave travel allowance (LTA).
Old Tax Regime vs New Tax Regime
| Tax Slab | Old Tax Regime | New Tax Regime |
| Below Rs. 2.5 Lakhs | 0% | 0% |
| Between Rs. 2.5 Lakhs and Rs. 5 Lakhs | 5% | 5% |
| Between Rs. 5 Lakhs and Rs. 7.5 Lakhs | 20% | 10% |
| Between Rs. 7.5 Lakhs and Rs. 10 Lakhs | 20% | 15% |
| Between Rs. 10 Lakhs and Rs. 12.5 Lakhs | 30% | 20% |
| Between Rs. 12.5 Lakhs and Rs. 15 Lakhs | 30% | 25% |
| Above Rs. 15 Lakhs | 30% | 30% |
Which Regime Should You Select?
While the new tax regime might look to be a great option, a taxpayer, who opts for this regime, can’t claim exemptions and deductions. Therefore, people who have a lot of exemptions and deductions to claim might prefer the old tax regime.
Below is an example that explains instance to help you understand both the regimes-
Mr. Singh earns Rs. 7.5 Lakhs. This amount consists of HRA of Rs. 60,000. He has medical insurance and its premium is Rs 10,000. Furthermore, Mr. Singh has invested Rs. 1 Lakh in LIC.
Income Tax Calculation-
| Old Tax Regime | New Tax Regime | |
| Annual Income | Rs. 7.5 Lakhs | Rs. 7.5 Lakhs |
| Standard Deduction | Rs. 50,000 | 0 |
| Medical Insurance | Rs. 10,000 | 0 |
| HRA | Rs. 60,000 | 0 |
| LIC | Rs. 1 Lakh | 0 |
| Taxable Income (Annual Income-Total Deduction and Exemption) | Rs. 5.30 Lakhs | Rs. 7.5 Lakhs |
Tax as per the Old and New Regime-
| Tax Slab | Old Tax Rate | Tax (Old) | New Tax Rate | Tax (New) |
| Up to Rs. 2.5 Lakhs | 0% | 0 | 0% | 0 |
| Between Rs. 2.5 Lakhs and Rs. 5 Lakhs | 5% | Rs. 12,500 | 5% | Rs. 12,500 |
| Between Rs. 5 Lakhs and Rs. 7.5 Lakhs | 20% | Rs. 6,000 | 10% | Rs. 25,000 |
| Total Taxes | Rs. 18,500 | Rs. 37,500 |
Point to Note- Cess is not considered while calculating the total taxes.
Therefore, it is beneficial for Mr. Singh to opt for the old tax regime as he can save more taxes.
In conclusion, the new tax regime is good for a person who has made no investments. Whereas, someone who has invested in tax saving instruments, health insurance, life insurance, etc. should consider the old tax regime.
