Old Vs New Income Tax Regime

A new income tax regime was introduced by our worthy Finance Minister - Smt. Nirmala Sitaraman in Budget 2020 with more tax slabs and lower tax rates. It was introduced to remove the dependency of citizens on tax consultants and simplify the tax structure. The new tax regime has reduced tax slabs for individual and HUF taxpayers with a condition to forgo certain tax deductions or exemptions.

Taxpayers will have a choice to choose the old or new tax regime. Even though the option must be exercised at the time of filing of return but for the purpose of payment of advance tax or TDS on salary this option has to be ascertained at the start of the financial year so that your employer can deduct TDS accordingly. However, the employee would still be able to choose to file the ITR no matter what option has been provided to the employer. Hence, you can switch between the new and old tax regime at the time of filing of the income tax return.

Comparison of Slab rates in Old and New regime

Deductions not allowed in the new tax regime

It is to be noted that if the taxpayer chose the new tax regime, he cannot claim most of the deduction & exemptions which were enjoyed in the old tax regime. It will be an opportunity lost for the taxpayers as he will not be able to enjoy the below mentioned deduction benefits.

For a Salaried person

• Standard deduction maximum deduction Rs. 50,000/-
• House rent allowances depending upon salary structure and rent paid
• Leave travel allowances & Perquisites
• Professional Tax paid - maximum Rs. 2,500/-
• Special Allowances provided u/s 10(14) except:

1. a) Transport allowance granted to a handicapped employee
2. b) Conveyance allowance
3. c) Any allowance granted to meet the cost of travel on tour or on transfer
4. d) Daily allowance

For Business or Profession

• Exemption to Special Economic Zone u/s. 10AA
• Deductions u/s. 32AD, 33AB, 33ABA, 35(1)(ii),35(1)(iia), 35(1)(iii), 35(2AA), 35AD and 35CCC and Additional depreciation u/s. 32(iia)
• Carried forward or unabsorbed depreciation of earlier years

For All the Taxpayers

• Interest paid on a home loan on self-occupied house Maximum deduction Rs. 2,00,000
• All deductions provided under Chapter VIA (except 80CCD(2) and 80JJAA)
• 80-C: LIP, tuition fees, PPF, EPF, tax saving FDR, Repayment of home loan, mutual funds (ELSS), NSC etc. Maximum deduction Rs. 1,50,000
• 80-D: Mediclaim insurance premium maximum deduction Rs. 25,000 to 1,00,000
• 80-G: Donation
• 80-DD: Differently-abled dependent maximum deduction Rs. 75,000 to 1,25,000
• 80-DDB: Expense for specified medical treatments
• 80-E: Interest on education loan
• 80-TTA: Interest on saving bank accounts

Deductions & Exemptions still available

Below listed are the benefits still available under the new regime:

• Interest received on post office saving account u/s 10(15)(i) Maxi Rs. 3,500
• Employer contribution in NPS or EPF up to 12% of salary & Interest on EPF up to 9.5% P.A
• Interest and maturity amount of PPF or Sukanya Smriddhi Yojna
• Commutation of Pension
• Gratuity received from employer Maximum Rs. 20 Lacs
• Amount received from LIP on maturity u/s 10(10D)

The choice to select tax regime year on year basis is available to the taxpayers having income from salary, house property, capital gain or other sources. However, if a taxpayer has income from business or profession he cannot select tax regime year on year basis.

Both old and new taxation regimes have their own advantages and disadvantages. The new taxation regime does not encourage investing habits in taxpayers. It is better for those taxpayers who have less income and less investments resulting in lesser deductions and exemptions. Each individual must evaluate which tax structure is best for him depending on his income level and deductions so that he can choose the most suitable regime accordingly.