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New Income Tax Regime vs Old: Which Will Help You Save More?

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At the Union Budget presentation, finance minister Nirmala Sitharaman proposed a new tax regime for the financial year 2020-21 that shall remain optional to individuals. Under the new structure, tax rates on various income slab were slashed, however, to avail this benefit, one will have to forego exemption and deductions under various sections.

New Income Tax Regime vs Old: Which Will Help You Save More?
 

New income tax rates for 2020-21:

Taxable Income Slab (Rs) Existing Tax Rates New Optional Tax Rates For FY 2020-21
0-2.5 Lakh Exempt Exempt
2.5-5 Lakh 5% 5%
5-7.5 Lakh 20% 10%
7.5-10 Lakh 20% 15%
10-12.5 Lakh 30% 20%
12.5-15 Lakh 30% 25%
Above 15 Lakh 30% 30%

Popular deductions that you will have to forego:

  • Standard deduction of Rs 50,000
  • Deductions towards meal coupons
  • Section 80C- contributions towards EPF, NPS, life insurance premiums, ELSS, PPF,
  • Section 80CCD- NPS contribution upto Rs 50,000
  • Section 80D- contributions towards medical insurance premium
  • Section 80DD- medical expenses of specially-abled dependents
  • Section 80DDB- medical expenditure on certain specified illnesses
  • Section 10- house rent allowance, travel allowance
  • Section 24- interest paid on home loan
  • Section 16- entertainment allowance, professional tax
  • Section 80E-interest paid on education loan
  • Section 80G-donations

Deductions that will continue

  • Section 80CCD(2)- Employer's contribution to NPS
  • Section 80TTA- Deduction on savings bank interest up to Rs 10,000

Old vs New Tax Regime with example

If you are also confused as to which tax regime you should opt for the financial year 2020-21, the examples below could help you make the decision.

Note that the following calculations have been simplified for illustration purposes. It has been assumed that the individual take into consideration for calculation is less than 60 years old, does not claim HRA and lives in his/her own residence.

For annual income of Rs 20 lakh

Particulars Under the existing tax regime In Rs In the new tax regime In Rs
Income 20,00,000 20,00,000
Deductions
Under sec 80C 1,50,000 -
Under sec 80D 25,000 -
House loan 2,00,000 -
Standard deduction 50,000 -
Taxable income 1,575,000 20,00,000
Upto Rs 2.5 lakh 0% 0 0% 0
above Rs 2.5 lakh but below Rs 5 lakh 5% 12,500 5% 12,500
above Rs 5 lakh but below Rs 7.5 lakh 20% 50,000 10% 25,000
above Rs 7.5 lakh but below Rs 10 lakh 20% 50,000 15% 37,500
above Rs 10 lakh but below Rs 12.5 lakh 30% 75,000 20% 50,000
above Rs 12.5 lakh but below Rs 15 lakh 30% 75,000 25% 62,500
above Rs 15 lakh 30% 22,500 30% 150,000
Tax payable 2,85,000 3,37,500

For annual income of Rs 10 lakh

 
Particulars Under the existing tax regime In Rs In the new tax regime In Rs
Income 10,00,000 10,00,000
Deductions
Under sec 80C 1,50,000 -
Under sec 80D 25,000 -
House loan 2,00,000 -
Standard deduction 50,000 -
Taxable income 5,75,000 10,00,000
Upto Rs 2.5 lakh 0% 0 0% 0
above Rs 2.5 lakh but below Rs 5 lakh 5% 12,500 5% 12,500
above Rs 5 lakh but below Rs 7.5 lakh 20% 15,000 10% 25,000
above Rs 7.5 lakh but below Rs 10 lakh 20% 0 15% 37,500
Tax payable 27,500 75,000

For annual income of Rs 5 lakh

Particulars Under the existing tax regime In Rs In the new tax regime In Rs
Income 5,00,000 5,00,000
Deductions
Under sec 80C 1,50,000 -
Under sec 80D 25,000 -
House loan 2,00,000 -
Standard deduction 50,000 -
Taxable income 75,000 500,000
Upto Rs 2.5 lakh 0% 0 0% 0
above Rs 2.5 lakh but below Rs 5 lakh 5% 3,750 5% 12,500
Tax payable 3,750 12,500

Which one should you opt for?

The choice finally boils down to an individual's salary structure and commitments towards debt/insurance.

Ideally, switching to the new tax regime will be easy for those with first jobs and at the start of their careers, who have not yet made any investments or purchased a house. It will help them comply with tax norms without any professional help.

Then again, if the individual receives meal coupons, allowances for rent, have relocated to a different city for the job, the existing regime can prove to be beneficial.

Start your tax and investment planning at the beginning of the financial year to make timely declarations on investment and decide what tax regime you would want to opt for.

Further, as a salaried employee, you can make a switch between the tax regimes every year based on your situation.

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