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.
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:
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:
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.
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