Old Vs New Income Tax Slabs: Which is better?

The latest budget has relaxed the burden of taxpayers by allowing them to choose to opt for the new income tax slabs for FY 2020-21 (AY 2021-22). Finance Minister Nirmala Sitharaman said the taxpayers can either continue with the old income tax slabs rates along with the concessional and deductions or can opt for the new income tax slabs rates by forgoing all the deductions and concessions. Although there are few benefits as well as drawbacks of the new tax scheme, which are as follows:

new-income-tax-slabs

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Benefits of the new tax scheme

As per the new tax scheme, there are seven slabs offered for the benefit of the individual taxpayers. However, the new income tax slabs are beneficial for people with low investments in policy schemes. (Refer the examples explained in this article).

Anyone paying taxes without claiming exemptions under the existing system can benefit from paying a lower upfront rate of tax.

Another benefit of switching over to the new optional regime is not to worry about complex return filings. As the Finance Minister said that there will be a simpler process of filing an income tax return for those who are opting for new income tax slabs scheme, so, if you are a person with no or few investments to show, you will find it much simpler to file taxes under the new system.

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Drawbacks of the new tax system

The new income tax slabs introduce lower tax rates but no benefit of exemptions. It is beneficial for people with low investments, but people who already invest a fair amount in tax-free savings schemes like PPF, NPS and claim deductions on them will suffer.

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Here is the comparison of rates as per new & existing rates and tax payable without deductions:

Income Slabs New Tax Rate New tax payable (Rs.) Existing Tax Rate Old tax payable (Rs.) Net savings (Rs.)
Upto Rs 2.5 Lakh Nil Nil Nil Nil Nil
Rs 2.5- Rs 5 Lakh 5% Nil 5% Nil Nil
Rs 5- Rs 7.5 Lakh 10% 39,000 20% 1,17,000 78,000
Rs 7.5 -Rs 10 Lakh 15% 78,000 20% 1,17,000 39,000
Rs 10 – Rs 12.5 Lakh 20% 1,30,000 30% 1,95,000 65,000
Rs 12.5 – Rs 15 Lakh 25% 1,95,000 30% 2,73,000 78,000
Above Rs 15 Lakh9ol 30% 3,51,000 30% 4,29,000 78,000

Note: Individual taxpayers who want to opt for the new slab rates, will not be eligible to claim the following tax benefits:

  1. Leave travel concession as contained in clause (5) of section 10;
  2. House rent allowance as contained in clause (13A) of section 10;
  3. Some of the allowance as contained in clause (14) of section 10;
  4. Standard deduction of Rs. 50,000 u/s 16;
  5. Employment/professional tax deduction as contained in section 16;
  6. Interest under section 24 in respect of self-occupied or vacant property referred to in sub-section (2) of section 23. Exemption of up to Rs 1,50,000 lakh under Section 80C for ELSS, NPS, PPF; [except 80CCD(2) – NPS Contribution by the employer]
  7. Exemption of up to Rs 25,000 under Section 80D for medical insurance premium
  8. Tax benefits for disability under Section 80DD/80DDBB
  9. break on interest on education loan under Section 80E
  10. Tax break on donations to NGOs under section 80G
  11. Additional deduction of up to Rs 1.5 lakh on Home Loan interest on affordable houses under section 80EEA  
  12. Others as prescribed

Therefore, as per the government, out of more than 100 deductions and exemptions that are currently available to taxpayers, around 70 of them will not be available under the new tax slab regime. Majorly includes deductions under chapter VI-A (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA)

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Income Tax Slab for Resident Individuals aged less than 60 Years

New-income-tax-slabs
Alternative 1 Alternative 2
Old Income Tax Slab New Tax Regime
Upto Rs 2,50,000 NIL Upto Rs 2,50,000 NIL
Rs 2,50,001 – Rs 5,00,000 5% Rs 2,50,001 – Rs 5,00,000 5%
Rs 5,00,001 – Rs 10,00,000 20% Rs 5,00,001 – Rs 7,50,000 10%
Rs 7,50,001 – Rs 10,00,000 15%
Above Rs 10,00,000 30% Rs 10,00,001 – Rs 12,50,000 20%
Rs 12,50,001 – Rs 15,00,000 25%
Above Rs 15,00,000 30%

Surcharge and Education Cess

Income Slab Surcharge Education Cess
From Rs  50,00,001- Rs. 1,00,00,000 10% 4%
Above Rs. 1,00,00,000 but upto Rs. 2,00,00,000 15% 4%
Above Rs. 2,00,00,000 but upto Rs. 5,00,00,000 25% 4%
Above Rs. 5,00,00,000 37% 4%

Income Tax Slab for Individuals having age above or equal to 60 years but less than 80 years

Alternative 1 Alternative 2
Old Income Tax Slab New Tax Regime
Upto Rs 3,00,000 NIL Upto Rs 2,50,000 NIL
Rs 3,00,001 – Rs 5,00,000 5% Rs 2,50,001 – Rs 5,00,000 5%
Rs 5,00,001 – Rs 10,00,000 20% Rs 5,00,001 – Rs 7,50,000 10%
Rs 7,50,001 – Rs 10,00,000 15%
Above Rs 10,00,000 30% Rs 10,00,001 – Rs 12,50,000 20%
Rs 12,50,001 – Rs 15,00,000 25%
Above Rs 15,00,000 30%

Surcharge and Education Cess

Income Slab Surcharge Education Cess
From 50,00,001-1,00,00,000 10% 4%
Above 1,00,00,000 15% 4%
Above 2,00,00,000 but upto 5,00,00,000 25% 4%
Above 5,00,00,000  37% 4%

Income Tax Slab for Individuals having age more than or equal to 80 years

Alternative 1 Alternative 2
Old Income Tax Slab New Tax Regime
Upto Rs 5,00,000 NIL Upto Rs 2,50,000 NIL
Rs 2,50,001 – Rs 5,00,000 5%
Rs 5,00,001 – Rs 10,00,000 20% Rs 5,00,001 – Rs 7,50,000 10%
Rs 7,50,001 – Rs 10,00,000 15%
Above Rs 10,00,000 30% Rs 10,00,001 – Rs 12,50,000 20%
Rs 12,50,001 – Rs 15,00,000 25%
Above Rs 15,00,000 30%

Surcharge and Education Cess

Income Slab Surcharge Education Cess
From 50,00,001-1,00,00,000 10% 4%
Above 1,00,00,000 15% 4%
Above 2,00,00,000 but upto 5,00,00,000 25% 4%
Above 5,00,00,000    37% 4%

Income Tax Slab for Non-Resident Individuals

Alternative 1 Alternative 2
Old Income Tax Slab New Tax Regime
Upto Rs 2,50,000 NIL Upto Rs 2,50,000 NIL
Rs 2,50,001 – Rs 5,00,000 5% Rs 2,50,001 – Rs 5,00,000 5%
Rs 5,00,001 – Rs 10,00,000 20% Rs 5,00,001 – Rs 7,50,000 10%
Rs 7,50,001 – Rs 10,00,000 15%
Above Rs 10,00,000 30% Rs 10,00,001 – Rs 12,50,000 20%
Rs 12,50,001 – Rs 15,00,000 25%
Above Rs 15,00,000 30%

Surcharge and Education Cess

Income Slab Surcharge Education Cess
From 50,00,001-1,00,00,000 10% 4%
Above 1,00,00,000 15% 4%
Above 2,00,00,000 but upto 5,00,00,000 25% 4%
Above 5,00,00,000    37% 4%

Now, the question arise for the taxpayers that should they continue with the old rates or shift to the new rates?

The answer is not difficult to find now with the below explained practical examples.

However, in the simple words, if the taxpayer plans to make use of only the standard deductions and concessions under Section 80C (investments, expenses, and life insurance premiums of up to Rs. 1.5 lakhs) available under the old tax regime and nothing more, then, switching to the new tax regime will provide a significant tax saving advantage.

On the other hand, if the taxpayers have ways to make claims also under other sections like Section 80D, Section 24, Section 80E, Section 16, and Section 10, it is better for them to continue with the older tax scheme as they will have a number of ways to claim various deductions and lower their taxable income and hence will make a far better saving on taxes.

Other important thing you should keep in mind is that if you are a regular salaried person, then you can choose between the New vs Old tax scheme each year. But if you have any business income, then you will not be able to switch back to the other system once you have made a choice.

Let’s understand with practical examples which slab is beneficial for taxpayers?

Example1: An individual is earning an income of Rs.5 lakhs per annum.

Particulars Tax as per the old scheme Tax as per the new scheme Interpretation
Gross Income 5,00,000 5,00,000 In both the cases that is new and old tax scheme, if your income is less than Rs 5 lakh, then you don’t pay any tax due to the tax rebate under Section 87A of Rs 12,500, which effectively means that if someone’s taxable income is less than Rs 5 lac, then they will not have to pay any taxes.
Deductions
Net Taxable income 5,00,000 5,00,000
Tax 12,500 12,500
Rebate 12,500 12,200
Net tax Nil Nil

Example 2: Low income taxpayer claiming deductions: An individual is earning income of Rs. 10 lakhs per annum and claiming the following deductions as per income tax act, 1961:

Deduction under section 80C: Rs. 1,50,000

Deduction under section 80D: Rs. 25,000

Deduction under section 24(b): Rs. 75,000

Particulars Tax as per old scheme Tax as per new scheme Interpretation
Gross Income 10,00,000 10,00,000  
Deductions under section: 80C 80D 24(b)   1,50,000 25,000 75,000   – – – While interpreting the example 1, if an individual is earning gross income Rs 10 lakh or more and want to utilize deductions under Section 80C, 80D, and 24(b) of the Income Tax Act, 1961, then its beneficial to continue in the old regime, otherwise the person is liable to pay Rs. 13,000 extra tax under the new scheme.
Net Taxable income 7,50,000 10,00,000
Tax (including cess @4%) 65,000 78,000
Saving of tax in old scheme 13,000  

Example 3: Low-income taxpayer not claiming deductions: An individual is earning an income of Rs. 10 lakhs per annum not claiming any income tax deduction.

Particulars Tax as per the old scheme Tax as per the new scheme Interpretation
Gross Income 10,00,000 10,00,000 While interpreting the example 3, if an individual is earning gross income Rs 10 lakh and not utilizing any deductions of the Income Tax Act, 1961, then it’s beneficial to opt for the new scheme, otherwise, the person is liable to pay Rs. 39,000 extra tax under the old scheme.
Deductions
Net taxable income 10,00,000 10,00,000
Tax amount (including cess 4%) 1,17,000 78,000
Tax savings under new scheme   39,000  

Example 4: A person has a taxable income of Rs. 12.5 lakhs per annum and he is eligible for claiming deductions under section 80C of the income tax act.

Particulars Tax as per old rates Tax as per new rates Interpretation
Gross Income 12,50,000 12,50,000 While interpreting the example 4, if an individual is earning gross income Rs 12.5 lakh and not utilizing any deductions of the Income Tax Act, 1961, then it’s beneficial to opt for the new scheme, otherwise the person is liable to pay Rs. 13,000 extra tax under the new scheme.
Deductions under section 80C 80D 24(b)   1,50,000 25,000 75,000   – – –
Net Taxable income 10,00,000 12,50,000
Tax (including cess @4%) 1,17,000 1,30,000
Saving of tax in old scheme 13,000  

Example 4: Low-income taxpayer not claiming deductions: An individual is earning an income of Rs. 12.5 lakhs per annum not claiming any income tax deduction.

Particulars Tax as per the old scheme Tax as per the new scheme Interpretation
Gross Income 12,50,000 12,50,000 While interpreting the example 4, if an individual is earning gross income Rs 12.5 lakh and not utilizing any deductions of the Income Tax Act, 1961, then it’s beneficial to opt for the new scheme, otherwise, the person is liable to pay Rs. 65,000 extra tax under the old scheme.
Deductions
Net taxable income 12,50,000 12,50,000
Tax amount (including cess 4%) 1,95,000 1,30,000
Tax savings under new scheme   65,000  

Summarization of above examples:

Example Gross Income Deductions availed Tax as per Old scheme Tax as per New scheme Saving of tax
1 5,00,000 Yes/No Nil Nil No effect
2 10,00,000 Yes 65,000 78,000 Old scheme
3 10,00,000 No 1,17,500 78,000 New scheme
4 12,50,000 Yes 1,17,000 1,30,000 Old scheme
5 12,50,000 No 1,95,000 1,30,000 New scheme

Majority of Indians who managed to save something over the years was because they were indirectly forced to save by investing in different schemes and getting advantage of tax exemptions and concessions. Hence, for those who do not understand the need to save and invest regularly, these exemptions helped in forced savings. Therefore, choosing the low tax rate benefit under the new scheme or encouraging saving by the means of availing deduction benefit is all your choice.

Conclusion

Concluding the above summarization, the new tax slabs re not beneficial for those who were taking the benefit of various deductions, because they were already able to bring down their taxable income considerably. So they were already paying a lower tax due to lower effective tax rate. It is only those who were unable to utilize any (or most) of the exemption/deductions are mow going to take benefit from the new tax slabs.

So basically, every person will have his own unique New Income Tax Slabs Vs Old Tax Slab calculation depending upon the deductions claimed by the persons. And to find out if the new tax slabs are more beneficial, each individual taxpayer will ideally have to do their own calculations.

However, trying to save taxes by choosing different slab rates are fine. But you should not give priority to tax saving. Instead, you should figure out whether you are saving enough for your future and retirement.

It seems that the new tax regime (which is moving towards zero exemptions) is based on the idea that what a person does with their money is up to them. So if they want to save, it’s up to them. If they don’t want to save, it’s also up to them.

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