New Tax Regime

Honorable Finance Minister Ms. Nirmala Sitharaman has recently released the Union Budget for the current fiscal year. It has some major changes over the previous budget. You can now choose to pay income tax under an optional new tax regime. 

The new tax regime applies to individuals and HUFs with lower tax rates and zero deductions and exemptions. We'll explore the characteristics of the new tax regime and how you will profit from it. 

What is the New Tax Regime? 

Budget 2020 introduces a new scheme under section 115BAC that allows individuals and HUF taxpayers to pay income tax at a lower rate. The new framework refers to income received on or after 1 April 2020 (FY 2020­21), which relates to AY 2021­22. The new regime provides concessional tax rates in contrast to tax rates under the current or old regime. Furthermore, because most exemptions and deductions are not eligible, the paperwork needed is lower, and the tax filing is easier. The reduced tax rate would provide more discretionary income for taxpayers who could not invest in defined instruments due to some financial or other personal reasons. 

The new tax regime allows for deductions for taxpayers, provided that they make investments in those instruments and the manner specified by the Act. This limits the investment options of the taxpayer as he only can invest in the stated instruments. However, the new scheme allows taxpayers the freedom to tailor their investment choices. 

Notice that the decision must be made every year except for those who have income from business or trade who will have only one chance of going back to the old regime in their lifetime. Furthermore, as soon as they return to the old tax system, they will not be able to opt for a new tax regime until their company income ceases to exist. 

What are the Rates Involved in the New Tax Regime? 

The tax rates under the new tax system are as follows: 

• Income Level New slab rates
• Income between INR 2.5 lakh and INR 5 lakh 5%
• Income between INR 5 lakh and INR 7.5 lakh 10%
• Income between INR 7.5 lakh and INR 10 lakh 15%
• Income between INR 10 lakh and INR 12.5 lakh 20%
• Income between INR 12.5 lakh to INR 15 lakh 25%
• Income over INR 15 lakh 30%

How does It Differ from the Old Tax Regime? 

The new tax regime differs from the old tax regime in the following aspects ­ 

1. Tax slabs­ The new tax regime provides lower tax rates. Still, over 70 deductions and exemptions are no longer available to the taxpayers. These deductions have been explained in the further sections. 

2. Increased choice of investment instruments­ The gain of deductions would not be a prerequisite for tax exemption. This could benefit certain groups of taxpayers who do not adhere to the defined investment methods since most of the investments have a lock-­in duration before they cannot be withdrawn. They can invest in open-­ended mutual funds, instruments, deposits that provide them with decent returns and flexibility to withdraw. 

3. Increase in disposable income­ The reduced tax rate would provide more discretionary income for taxpayers who could not invest in defined instruments due to some financial or other personal reasons. 

Which Exemptions and Deductions are Allowed in the New Tax Regime? 

You may apply for a tax exemption for the following under the new tax regime: 

• Transport allowances in the case of specially­-abled citizens.
• Conveyance allowance earned to meet the transport cost incurred as part of the job. • Any cost incurred to cover the cost of a transfer
• Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.

Which Exemptions and Deductions have been Removed in the New Tax Regime?

Now let us understand the exemptions and deductions that you can no more avail ­ 

1. The provisions in section 10 as follows will no longer be available: (5)­Leave travel concession; (13A)­House payment for rent; (14)­Special allowance detailed in provision 2BB (e.g., children's education allowance, hostel allowance, travel allowance, per diem allowance, uniform allowance, etc.); (17) – Allowances for Members of Parliament or MLAs; (32)­The provision for the clubbing of income of minor; 

2. Exception for the SEZ units referred to in section 10AA; 

3. The standard deduction, the deduction for the entertainment allowance, and the employment or professional tax referred to in Section 16; 

4. Interest in respect of self-occupied or vacant property as referred to in section 24 (loss under the head of the IFHP for the rented house shall not be allowed under any other head.); 

5. The additional depreciation referred to in section 32(1)(iia); 

6. The deductions referred to in sections 32AD, 33AB, and 33ABA; 

7. Various deductions for donation or expenditure on scientific research found in sub­clause (ii) or sub­clause (iia) or sub­clause (iii), sub­clause (1) or sub­clause (2AA) of section 35; 

8. The deduction referred to in section 35AD or 35CCC; 

9. The deduction from the family pension referred to in paragraph(iia) of Section 57; 

10. Any deduction under chapter VI­A (such as section 80C, 80CCC, 80CDC, 80D, 80DDB, 80E, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80­IAB, 80­IAC, 80­IB, 80­IBA, etc. However, deductions under subsection (2) of Section 80CCD (employer contribution on behalf of workers in the notified pension scheme) and Section 80JJAA (for new employment) can be asserted. 

Final Thoughts

If a taxpayer is seeking flexibility in investment choices and does not wish to invest in defined qualifying instruments may consider a new tax regime. But if the person already has investments in various schemes and wishes to continue investing in the same schemes, he should opt for the old tax regime. Understand the difference between the old tax regime and the new tax regime to make smart investments.

In simple words, if you plan to avail many exemptions and deductions, opt for the old tax regime. Else, choose the new one.