Which one is better for you: Old Tax Regime or New Tax Regime?

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“Understanding the tax regime is best left to chartered accountants and tax professionals”, Nina says. Most people, tax payers included, believe that decoding the tax system is a difficult task that is the domain of experts. 

While this might be true to an extent, it is important that each of us make an individual effort to understand the what, why, when and how’s of the taxing system in India as it is not just a figure on a piece of paper, but a substantial portion of one’s salary that goes into the government’s coffers. 

In fact, the new tax regime has made people rethink about the options available with respect to their income tax returns and has induced a more active participation on their end. Feel like you have missed out on this? Worry not, the contents of this article will bring you up to speed in no time.

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

The union government, in an effort to simplify the direct tax regime, introduced a slew of changes in the Budget of 2020-21. The same 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, 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.

The income tax rates have been indicated below – 

Total Income (INR)

Old Regime

New Regime

Up to 2.5 lakhNilNil
2.5 to 5 lakh5%5%
5 to 7.5 lakh20%10%
7.5 to 10 lakh20%15%
10 to 12.5 lakh30%20%
12.5 to 15 lakh30%25%
Above 15 lakh30%30%

Additionally, the finance minister has announced that senior citizens i.e. those individuals aged above 75 years who only have interest income and pension are exempt from filing tax returns.

NRIs have also gained for they will be spared from double taxation under the new rules that will be shortly notified.

Which regime should you go for? 

There is no standard answer for this question. But we will explore the implications of choosing either of the regimes with the help of some examples. Nina is a 35 year old working woman and earns a handsome sum of rupees ten lakh annually. Faced with the dilemma of how to go about filing her tax returns for the year, she consults her uncle Ramamurthy for some help. This is what he has to say.

There is a systematic way in which one can determine which of the two regimes will be more beneficial. The first step is - 

  • Calculate all the exemptions that you will be availing

The exemptions that one can avail are numerous – Leave Travel Allowance, House Rent Allowance, Food Coupons and Vouchers, Mobile and Internet Reimbursement etc.

  • Calculate all the deductions that can be claimed

Two deductions that a salaried individual will get by default is 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.

On doing this, combine the totals under these two headings and deduct it from the salary to know what the taxable income would be. For instance, Nina receives an annual income of rupees ten lakh and in her case the total amount of deductions and exemptions is rupees fifty thousand. 

The tax payable as per the old regime is rupees one lakh six thousand and six hundred. But the tax payable under the new tax regime would amount to rupees seventy eight thousand. The net tax benefit as per the new regime would be rupees twenty eight thousand six hundred.

However, let us for a moment assume that Nina received rupees ten lakh as her income but the exemptions and deductions total to rupees two lakh fifty thousand. Then the tax payable as per the old regime would be rupees sixty five thousand and the tax payable as per the new regime would be rupees seventy eight thousand. The taxpayer stands to gain more from the old regime i.e. a sum of rupees thirteen thousand.

Please note: the amounts have been calculated using the income tax department’s tax calculator available on their e-filing portal (incometaxindiaefiling.gov.in). One can use the same to arrive at tentative figures that must be paid as tax under the new and the old regime.

This can be further explained using different scenarios using detailed break-ups of the deductions and exemptions that the taxpayer wishes to claim 

Scenario 1 – claim few exemptions and deductions

Sundari, Nina’s colleague earns rupees nine lakh as her annual salary. She is claiming a few deductions and exemptions. Have a look at her income tax returns – 

Heads

Old Tax Regime (INR)

New Tax Regime (INR)

a) Annual Income9,00,0009,00,000
b) Standard Deduction-50,000 
c) EPF Contribution (Section 80C)-25,000 
d) HRA-20,000 
e) Total (Deduction & Exemption)95,000 
Net Taxable Income (a-e)7,85,0009,00,000
Tax payable7644062400

The tax benefit as per the new regime is rupees fourteen thousand and forty.

Scenario 2 – claim all major exemptions but few deductions

Nina’s friend Sudanshu earns rupees nine lakh like Sundari. However, he claims all the major exemptions and a few deductions. Let us take a look at his tax liability – 

Heads

Old Tax Regime (INR)

New Tax Regime (INR)

a) Annual Income9,00,0009,00,000
b) Standard Deduction-50,000 
c) EPF Contribution (Section 80C)-25,000 
d) HRA-20,000 
e) Leave Travel Allowance-20,000 
f) Total (Deduction & Exemption)1,15,000 
Net Taxable Income (a-f)7,85,0009,00,000
Tax payable7228062400

The tax benefit as per the new regime is rupees nine thousand eight hundred and eighty.

Scenario 3 – claim all major exemptions and deductions

Sasha, Nina’s sister also earns rupees nine lakh annually and claims all the major deductions and exemptions. Her income tax returns appears as follows - 

Heads

Old Tax Regime (INR)

New Tax Regime (INR)

a) Annual Income9,00,0009,00,000
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)7,20,0009,00,000
Tax payable58,76062,400

The tax benefit as per the old regime is rupees three thousand six hundred and fourty.

Conclusion 

While the move of the government is a step in the right direction, unaware tax payers will face difficulty in utilising the benefits of the option available to them. It is extremely important that one invests some time and effort into understanding the nuances and fine differences between the alternate taxation regimes. 

Use the help of online websites, detailed information available on the government’s official website and the input of experts to comprehend how the system works. There is no dearth of sources to help you out, the question is – are you willing to invest time and effort into it?

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