“The objective of tax planning must be to keep more of what you earn, legally”
– Emkon Global
There are no free lunches. That has been made clear by our government. A new tax regime for Individuals was introduced during this year’s budget. This becomes applicable for the current financial year for which tax returns will be prepared post-March 2021. The new regime comes with lower tax rates and higher slabs – something we have all been waiting for.
However, the catch is that you have to CHOOSE between the old (Current) tax regime and the new tax regime. The new regime does not make things easier for laymen.
Old (Current) Tax Regime
It would be safe to say the old system is a bit complicated but offers plenty of benefits in the form of deductions. If you have filed your tax returns regularly, you would know that you have to make certain investments such as Public Provident Funds, Tax Saver Mutual Funds or Bonds, LIC Premiums or Mediclaim and many more such avenues every year to avail deductions that help you reduce your taxation liability.
As per the old tax regime, we have been following so far, every individual has different tax slab applicability considering age & gender. However, approximately ₹ 1,50,000 to ₹ 2,50,000 are invested by middle-income individuals every year to avail tax benefits.
New Tax Regime
Key Points
- The new tax regime does not allow 70 deductions which were allowed in the old regime.
- The option to choose this new scheme is available only for INDIVIDUALS.
- If you choose the new regime, you can switch back to the old regime any year you want if you only have salary income.
Here’s a comparison between the old tax slabs & rates vs the new tax slabs & rates:
| Tax Slab (₹) | Old Tax Rates | New Tax Rates |
| 0 – 2,50,000 | 0% | 0% |
| 2,50,000 – 5,00,000 | 5% | 5% |
| 5,00,000 – 7,50,000 | 20% | 10% |
| 7,50,000 – 10,00,000 | 20% | 15% |
| 10,00,000 – 12,50,000 | 30% | 20% |
| 12,50,000 – 15,00,000 | 30% | 25% |
| 15,00,000 & above | 30% | 30% |
So which one to choose? – Old or New?
The middle-income individuals happen to be the most likely to be impacted by pay cuts and layoffs as a result of the economic crisis that has started during the ongoing pandemic.
Having an additional few lakhs disposable at hand would be worth it and hence all individuals should consider filing their next year returns by opting the new tax regime. It would give you a chance to avoid making investments where there are lock-in periods or limitations on withdrawal. Considering the possibility of financial troubles, having more money at your disposal would add to your financial security.
So if you are someone who is cash-strapped or could possibly be impacted by pay cuts or layoffs, a clear winner for you is the NEW Regime.
It’s worth noting that you can switch back to the old regime anytime in the following years unless you are an individual who also has income from business & profession. If you have income from business & profession, you have only one chance of switching back until the time you have business income.
We suggest this only for individuals to have more liquidity at their disposals.
Under regular circumstances, there is NO clear answer that would apply to all individuals. It depends on what kind of deductions you have been claiming and also your age.
It is necessary to do a new vs old evaluation to compare in which regime you save money.
Scenario 1. – If you avail all common deductions
Mr Harsh has an income of Rs. 12,50,000 from salary. He utilises his Section 80C limit of Rs. 1,50,000 by investing in Tax saver mutual funds and PPF. He also pays Rs. 40,000 for mediclaim deductible under Section 80D. Only Rs. 25,000 of that amount is allowed as deduction since he is not a senior citizen.
Here’s how his tax computation looks like under the old and new system.
| Income Tax Computation | ||
| Particulars | Old Tax Regime (₹) | New Tax Regime (₹) |
| Annual Income [A] | 12,50,000 | 12,50,000 |
| 1) Standard Deduction | (50,000) | 0 |
| 2) Section 80C (PPF, etc) | (1,50,000) | 0 |
| 3) House Rent Allowance | (50,000) | 0 |
| 4) Section 80D (Mediclaim) | (25,000) | 0 |
| 5) Leave Travel Allowance | (25,000) | 0 |
| 6) Section 80CCD (NPS) | (30,000) | 0 |
| Total [B] | 3,30,000 | 0 |
| Net Taxable Income [A-B] | Rs. 9,20,000 | Rs. 12,50,000 |
| Tax Slabs | Old Rates | New Rates | Tax (Old) | Tax (New) |
| 0 – 2,50,000 | 0% | 0% | 0 | 0 |
| 2,50,000 – 5,00,000 | 5% | 5% | 12,500 | 12,500 |
| 5,00,000 – 7,50,000 | 20% | 10% | 50,000 | 25,000 |
| 7,50,000 – 10,00,000 | 20% | 15% | 34,000 | 37,500 |
| 10,00,000-12,50,000 | 30% | 20% | 0 | 50,000 |
| Net Tax | – | – | 96,500 | 1,25,000 |
| Cess | – | – | 3,860 | 5,000 |
| Gross Tax | – | – | ₹ 1,00,360 | ₹ 1,30,000 |
In this scenario, the clear choice is the Old system as there is a saving of Rs. 29,640
Scenario 2. – If you avail lesser deductions
Ms Harshika has an income of Rs. 9,00,000 from salary. She utilises her Section 80C limit to the extent of Rs. 50,000 by investing in Employee Provident Fund and tax saver mutual funds. She does have a few investments in the stock market but they are not eligible for deduction.
Here’s how his tax computation looks like under the old and new system.
| Income Tax Computation | ||
| Particulars | Old Tax Regime (₹) | New Tax Regime (₹) |
| Annual Income [A] | 9,00,000 | 9,00,000 |
| 1) Standard Deduction | (50,000) | 0 |
| 2) Section 80C | (50,000) | 0 |
| 3) Leave Travel Allowance | (25,000) | 0 |
| Total [B] | 1,25,000 | 0 |
| Net Taxable Income [A-B] | ₹ 7,75,000 | ₹ 9,00,000 |
| Tax Slab | Old Rates | New Rates | Tax (Old) | Tax (New) |
| 0 – 2,50,000 | 0% | 0% | 0 | 0 |
| 2,50,000 – 5,00,000 | 5% | 5% | 12,500 | 12,500 |
| 5,00,000 – 7,50,000 | 20% | 10% | 50,000 | 25,000 |
| 7,50,000 – 10,00,000 | 20% | 15% | 5,000 | 22,500 |
| Net Tax | – | – | 67,500 | 60,000 |
| Cess | – | – | 2,700 | 2,400 |
| Gross Tax | – | – | ₹ 70,200 | ₹ 62,400 |
In this scenario, the clear choice is the New system as there is a saving of Rs. 7,800
Conclusion
The only conclusion that you should draw from the above two illustrations is that there is no blanket solution applicable to all individuals. Factors like your income, age (Senior citizens have more benefits under the old system), the number of deductions you avail and your financial situation for this year considering the recession at large will determine which regime is better for you.
Do not pay attention to any blanket claims that old or new is good for you. There is no one-size-fits-all solution there. Consult your Tax Return Preparer or Chartered Accountant to make an informed decision.
The bottom line is – Do an Old vs New Tax computation to arrive at a decision.