Income Tax

Comparison Between New Tax Regime and Old Tax Regime

Dec 02, 2021
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The union government, in an effort to simplify the direct tax regime, introduced a slew of changes in the Budget of 2020-21. While these new changes are a parallel system to the old regime, both some with a fair share of advantages and disadvantages. This same system of parallel regimes has been continued as per the Budget of 2021-22. The budget presents two unique options to the taxpayer – 

  1. To continue the existing tax regime with the tax rates that subsisted before the introduction of the new regime (i.e. the old tax regime), or
  2. To opt-in for the new tax regime, with revised tax rates, but forgo claims of any deductions or exemptions provided under the Income Tax Act and Rules.

Difference between the new tax regime and the old one 

The income tax rates for both of the regimes have been indicated below – 

Total Income (INR)

Old Regime

New Regime

Up to 2.5 lakhs

Nil

Nil

2.5 to 5 lakhs

5%

5%

5 to 7.5 lakhs

20%

10%

7.5 to 10 lakhs

20%

15%

10 to 12.5 lakhs

30%

20%

12.5 to 15 lakhs

30%

25%

Above 15 lakhs

30%

30%

The additional differences are – 

  • Taxpayers will be losing the following deductions in the new tax regime – 
  • Standard Deduction of INR 50,000
  • House Rent Allowance (HRA)
  • Leave Travel Allowance (LTA)
  • Entertainment Allowance
  • Professional Tax (PT)
  • Interest paid on Housing Loan u/s 24
  • 80C Deductions like PPG, Insurance, NSG Home Loan Principal, etc
  • 80D Deduction i.e., Health Insurance paid for self and family
  • 80DD and 80DDB related to Disability
  • Interest paid on Education loan u/s 80EE
  • Donations u/s 80G, 80GGA, 80GGC
  • Certain deductions and exemptions are not allowed for business income.
  • Taxpayers will have an increased take-home salary as compared to the old regime.
  • There is reduced compliance and paperwork under the new tax regime.
  • Lower-income earners will benefit from the new tax rates.

Any similarities between the two regimes?

  • The tax rates are the same in both regimes if one’s taxable income is below INR 5 lakhs or above INR 15 lakhs.
  • The following exemptions are available under the new and the old regime alike – 
  • Transport allowances in case of differently-abled persons.
  • Conveyance allowance that is received to meet expenditure related to commuting for professional needs. 
  • Any compensation received to help employees manage the cost of travel while on tour or when transferred.
  • Daily allowance received for any ordinary expenditure due to the absence from place of duty.

An example to understand better

Chandrika was excited to learn that the government of India had announced a slew of tax reforms that would benefit the taxpayers, which is why she decided to check this out herself. Chandrika’s income tax returns, as she calculated in the confines of her office cabin, appears as follows under the two different regimes - 

Heads

Old Tax Regime (INR)

New Tax Regime (INR)

a) Annual Income

9,00,000

9,00,000

b) Standard Deduction

-50,000

 

c) Section 80C

-25,000

 

d) HRA

-20,000

 

e) Leave Travel Allowance

-20,000

 

f) Meal Coupons

-15,000

 

g) mobile reimbursements 

- 5,000

 

h) medical insurance deduction

-45,000

 

i) Total (Deduction & Exemption)

1,80,000

 

Net Taxable Income (a-i)

7,20,000

9,00,000

Tax payable

58,760

62,400

The tax benefit as per the old regime is INR 3,640. Seems like she stands to gain more under the old regime than the new!

Any additional points to keep in mind?

  • A total of 70 exemptions have been removed with the introduction of the new tax regime. Therefore, these cannot be availed by the taxpayer if they choose to opt-in for this.
  • In case one’s taxable income is below INR 5 lakhs or above INR 15 lakhs, then the tax rates are the same in both regimes – therefore, the older regime that allows for exemptions is better suited for taxpayers.
  • One must consider one’s taxable income, lifestyle, stage in life, short and long-term priorities, financial goals before deciding which tax regime to opt for. 
  • Choosing the new tax regime to save on tax liability might seem like a simplistic choice, but in the long run, having investments will make the old regime more beneficial. Choose wisely.
  • There is a systematic way in which one can determine which of the two regimes will be more beneficial. The first step is - 
  1. Calculate all the exemptions that you will be availing - The exemptions that one can avail of are numerous – Leave Travel Allowance, House Rent Allowance, Food Coupons and Vouchers, Mobile and Internet Reimbursement, etc.
  2. Calculate all the deductions that can be claimed - Two deductions that a salaried individual will get by default are standard deduction and Employee Provident Fund. The other deductions that can be availed are Child’s tuition fees, Life Insurance premium payments, Equity Linked Saving Scheme, investment in NPS, etc.
  3. On doing this, combine the totals under these two headings and deduct them from the salary to know what the taxable income would be.

Conclusion

Taxpayers may evaluate both the regimes and make a choice after careful consideration of pros and cons of each as certain deductions and exemptions may not be applicable under the new tax regime. The choice can be exercised on a yearly basis and a regime that is more beneficial can be adopted by the individual in question (except for those who have income from business or profession).

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