Old or New: A Comparison of The Two Tax Regimes for The Average Taxpayer
With the introduction of Budget 2020-21, a new tax regime came into the picture. For the taxpayer, the arrival of the new regime (in effect since April 1, 2020) also provides them with the flexibility to choose between the two. Let’s deep-dive into the comparison between the two so that you can take an informed decision.
Tax is a subject that befuddles most. Taxpayers have one, and only one motive — save tax. In the past, the Government of India tweaks the tax structure during the announcement of the budget every year.
However, Budget 2020-21 brought to the fore a new tax regime whilst retaining the older regime. With its introduction, taxpayers now get to choose one of the two regimes. But for an average Indian, choosing one over the other who is befuddled by the concept of taxes is easier said than done.
Many tax calculators can be found online which compares both the tax regimes based on your inputs. While these will help you zero in one regime, we’re here to tell you about the basics — the differences between the two regimes, mostly. With that said, let’s get right to it.
The Tax Slabs, Similarities, and The Stark Differences
First, for the old tax regime, the deductions and tax benefits remain the same. From the table given below, you can notice that the tax rates for the new regime are comparatively lower. But there is a catch — you need to forgo certain exemptions. The exemptions you need to let go include:
- INR 1.5 Lakh — all investments under Section 80C
- INR 50, 000 — standard deduction
- INR 50,000 — NPS contribution
- INR 10,000 — savings bank interest under Section 80TTA
- INR 25,000 [INR 50,000 for senior citizens and parents] — medical insurance premium
- INR 50,000 — Interest income for senior citizens under Section 80TTB
- INR 3.5 lakh for affordable housing, INR 2 lakh for others — housing loan interest
- INR 75,000-1 lakh — disability allowance for self or dependant
- INR 40,000 [ INR 1 lakh for senior citizens] — treatment of dependant or self
- House Rent Allowance (HRA)
- Leave Travel Allowance/Concession (LTA)
- Education loan interest
- Donations made to specified entities
| IT Slabs | Rate — New Regime | Rate — Old Regime | Surcharge |
| Up to INR 2.5 lakh | exempted | exempted | 0 |
| INR 2.5 lakh – 5 lakh | 5% | 5% | 0 |
| INR 5 lakh – 7.5 lakh | 20% | 10% | 0 |
| INR 7.5 lakh – 10 lakh | 20% | 15% | 0 |
| INR 10 lakh – 12.5 lakh | 30% | 20% | 0 |
| INR 12.5 lakh -15 lakh | 30% | 25% | 0 |
| INR 15 lakh – 50 lakh | 30% | 30% | 0 |
| INR 50 lakh – 1 crore | 30% | 30% | 10 |
| INR 1 crore – 2 crore | 30% | 30% | 15 |
| INR 2 crore – 5 crore | 30% | 30% | 25 |
| INR 5 crore and Above | 30% | 30% | 37 |
As for the similarities between the old and the new tax regimes, they are as follows:
- Cess on health, education and the surcharge rates do not change.
- Section 87A rebate — For tax-paying individuals who draw an annual income up to INR 5 lakh, the tax rebate of INR 12,500 applies on the tax that is calculated.
Comparing Old and New Slab With Two Examples
Still confused about the tax regimes? Here are two cases that compare both the regimes side-by-side for two scenarios; one where the taxpayer has not made investments and the other where he has.
Case A: Taxpayer has not made any kind of investment. In this case, calculation under both regimes will be as follows:
| New Regime | Old Regime | |
| Gross income | INR 8,50,000 | INR 8,50,000 |
| Standard Deduction u/s 16(ia) | 0 | INR 2400 |
| Employment Tax u/s 16(iii) | 0 | INR 50,000 |
| Taxable income | INR 8,50,000 | INR 7,97,600 |
| Calculated tax | INR 52,500 | INR 59,520 |
| Rebate under Section 87A | 0 | 0 |
| Cess + Net Tax | INR 54,600 | INR 61,901 |
Case B: Taxpayer has made investments under Sections 80C, Section 80D, and also receives HRA. In this case, calculation under both regimes will be as follows:
| New Regime | Old Regime | |
| Gross income | INR 8,50,000 | INR 8,50,000 |
| Standard Deduction u/s 16(ia) | 0 | INR 2400 |
| Employment Tax u/s 16(iii) | 0 | INR 50,000 |
| HRA u/s 10 (13A) | 0 | INR 1,00,000 |
| LTA u/s 10(5) | 0 | INR 60,000 |
| Exemption u/s 80C | 0 | INR 1,50,000 |
| Exemption u/s 80D | 0 | INR 25,000 |
| Taxable income | INR 8,50,000 | INR 4,62,600 |
| Calculated tax | INR 52,500 | INR 10,630 |
| Rebate under Section 87A | 0 | INR 10,630 |
| Cess + Net Tax | INR 54,600 | 0 |
The option to switch to a new regime offers much-needed flexibility to taxpayers who can decide depending on their financial situation. The switch can be made every year for taxpayers, but the same does not apply to business owners. It is also clear that switching to the new regime might not be the best option, especially if you avail exemptions and allowances.
Related Articles:
(1 votes, average: 5.00 out of 5)Subscribe For Newsletter
Subscribe to get the latest news and happenings around recruitment space
