Income Tax Slabs and Rates

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The Union budget is a much-awaited document for experts and common people alike for it contains a slew of measures that will directly impact the disposable income that each individual tax payer will have. Financial year 2020-21 saw an introduction of a new taxation regime that will coexist with the old regime which has been continued for the ensuing year of 2021-22. The details of the two taxation regimes have been highlighted below – 

What is an income tax slab?

Income tax is levied based on different ranges of income, and these are called slabs. Income tax slab rates specify the threshold annual income limits at which a higher or lower rate of tax is applicable. These slabs may or may not change with each budget session.

Income tax slab rates for Financial Year 2020-21 (Assessment Year 2021-22) 

Total Income (INR)

New Regime

Up to 2.5 lakh

Nil

2.5 to 5 lakh

5%

5 to 7.5 lakh

10%

7.5 to 10 lakh

15%

10 to 12.5 lakh

20%

Key points to keep in mind

The taxpayer has to forego the following exemptions and deductions while availing the new regime - 

  • Standard deductions of up to INR 50,000 under Section 16 of the Act.
  • Deductions of up to a maximum of INR 1,50,000 under Section 80C of the Act.
  • Deduction of up to a maximum of INR 2,00,000 under Section 24 of the Act for interest on loan. 
  • Entertainment allowance and professional tax deduction for Government employees under Section 16(ii).
  • Leave travel allowance (LTA).
  • House rent allowance (HRA).
  • Medical insurance premium of a maximum of INR 25,000 and INR 50,000 for parents and senior citizens under Section 80D.
  • Savings bank interest of a maximum of INR 10,000 under Section 80TTA.
  • Interest income (for senior citizens) under INR 50,000 under Section 80TTB.
  • Interest on education loan -deduction for 8 consecutive years under Section 80E.
  • Treatment of self or dependent for specified disease for a maximum of INR 40,000 (with a maximum of INR 1,00,000 for senior citizens) and treatment of disability of self or dependant for a maximum of INR 75,000 to INR 1,25,000 depending on disability under Section 80D and under Section 80 DDB.
  • Donations to specified entities.

However, there are certain benefits that are still available under the new tax regime such as – 

  • Commutation of Pension.
  • Gratuity received from employer Maximum rupees twenty lakhs.
  • Interest and maturity amount of PPF or Sukanya Samriddhi Yojana.
  • Employer contribution in NPS or EPF up to 12% of salary and interest on Employee Provident Fund up to 9.5% per annum.
  • Interest received on post office saving accounts under Section 10(15)(i) for a maximum of rupees three thousand five hundred. 
  • Amount received from Life Insurance policy on maturity under Section 10(10D).

Cess and surcharge will still be charged.

Income tax slab rates for Old Tax Regime Financial Year 2020-21 

Total Income (INR)

Old Regime

Up to 2.5 lakh

Nil

2.5 to 5 lakh

5%

5 to 7.5 lakh

20%

7.5 to 10 lakh

20%

10 to 12.5 lakh

30%

Key points to keep in mind

  • A person availing very high deductions under 80D, HRA, or 80D should pick the old taxation regime. They can benefit by claiming those deductions and saving money.
  • If the quantum of deductions is less than two lakh rupees then this regime must not be opted for.
  • The details of the applicable deductions and exemptions can be derived from Form 16 and Forms 16A that the employer will provide to the employee.

What is the difference between the old and the new regime? 

The key differences between the old and the new regime are as follows - 

Basis

Old taxation regime

New taxation regime

Main feature

This system has higher tax rates but is accompanied with a lot of options to reduce taxes.

This system has more slabs, a lower tax rate but no way to reduce the taxes payable.

Options available for reduction in taxes

There are umpteen ways to reduce ones taxes through nearly 70 exemptions and deductions.

This option is not available.

Tax slabs

There are four tax slabs available.

There are seven tax slabs available. 

Greatest advantage of the regime

Scope for saving on a lot of money if there are a lot of deductions and exemptions that one can claim.

The tax payers do not have to rush to invest their money in tax-saving schemes and insurances or park their money in avenues which are not aligned with their financial goals, just to save tax.

Flexibility and simplicity 

Less flexible are more difficult to comprehend due to the different exemptions and deductions.

The new system is more flexible and can even end up simplifying the process.

Are there any conditions you need to fulfil to opt for the new regime?

The conditions that exist if one has to opt in for the new regime are as follows – 

  • An individual who does not have any business income can opt for the new tax regime.
  • If an individual with business income has claimed deductions and tax exemptions available under the Income Tax Act, it will be assumed that he or she has chosen the old regime and he or she will not be able to opt for a new tax regime again in their lifetime.
  • If one has opted for the new tax regime, then he or she cannot change the same during the financial year for the purpose of calculation of TDS.
  • In case the income consists of business or professional income and one is already a part of the new tax regime, then the option to withdraw from it is available only once. 

Conclusion 

It has been observed that the old tax regime inculcates the habit of savings in the taxpayer while the new regime is friendly towards those who have just started their career and have lesser deductions to reduce their overall tax burden. 

The only way that one can take advantage of either of the regimes is to evaluate the pros and cons of both in a comparative manner and choose the option best suited for them.

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