Understanding the Difference Between Old and New Tax Regimes

Financial Planning

Understanding the Difference Between Old and New Tax Regimes

By Jupiter Team · · 6 min read

The new tax regime was introduced in the 2020 budget to simplify taxation and lower taxes on different income slabs. However, it also removed exemptions or deductions, making it difficult for taxpayers to decide which system to opt for.

In this blog, we will analyse the differences between the old and new tax regimes and their benefits and disadvantages so that you can decide which is better for you.

The New Tax Regime

The new tax regime includes six tax slabs with existing rates lowered on an income of up to INR 15 lakh. To understand what has really changed, here is a comparison between the old and new tax regime slabs:

Total Income (INR)

Old Regime

New Regime

Up to 2.5 lakhs

Nil

Nil

2.5 to 5 lakhs

5%

5%

5 to 7.5 lakhs

20%

10%

7.5 to 10 lakhs

20%

15%

10 to 12.5 lakhs

30%

20%

12.5 to 15 lakhs

30%

25%

Above 15 lakhs

30%

30%

Exemptions and Deductions Still Applicable in the New Tax Regime

The new tax regime does not offer exemptions and deductions available in the old tax system. However, there are other deductions that you can claim, including:

  • Interest received on Post Office Savings Account u/s 10(15)(i), up to INR 3,500.
  • A gratuity of up to INR 20 lakhs received from the employer.
  • Income from maturity of Life Insurance Policy under Section 10(10D).
  • Employer contribution in NPS or EPF, up to 12% of salary and interest on EPF up to 9.5% p.a.
  • Income from life insurance and agricultural farming.
  • Standard reduction on rent.
  • Retrenchment compensation.
  • Leave encashment on retirement.
  • VRS proceeds, maximum of INR 5 lakhs.
  • Retirement cum death benefit.
  • Scholarship received for education.
  • Interest and maturity amount of PPF or Sukanya Smriddhi Yojna.
  • Deductions u/s 80CCD (2) (employers contribution in notified pension scheme) and 80JJAA (for new employment).

Benefits of the New Tax Regime

  • The new tax regime has not replaced the old tax regime, allowing you to choose between the two.
  • You have the flexibility to choose your investment options since there is no compulsion to invest in tax saving schemes under section 80C.
  • The new tax regime offers multiple tax slabs based on your annual income.

Disadvantages of the New Tax Regime

While the finance minister has retained some exemptions and benefits under the new tax regime, several opportunity losses emerge depending upon the type of taxpayer you are. Let’s have a look at three types of taxpayers and the disadvantages to each section:

1. Salaried Person

A salaried person will lose the following benefits under the new tax regime:

  • Standard deduction maximum deduction INR 50,000/-
  • Professional Tax paid by maximum INR 2,500/-
  • Leave travel allowances
  • House rent allowances depending upon salary structure and rent paid
  • Special allowances provided u/s 10(14) (except conveyance allowance, cost of travel for business or transfer, and transportation expenses for disabled employees)
  • Daily allowance
  • Perquisites

2. A Business Owner or Professional

A person who runs a private business or a professional/freelancer will have to give up the following benefits:

  • Exemption to SEZ under section 10AA
  • Deductions under the following sections:

32AD

33AB
33ABA
35(1)(ii)
35(1)(iia)
35(1)(iii)
35(2AA)
35AD
35CCC
  • Additional depreciation u/s. 32(1)(iia)
  • Previous depreciation that is in excess or has been carried forward

3. Common Disadvantages to All Taxpayers

  • Interest paid on a home loan on a self-occupied house, up to INR 2,00,000
  • All deductions mentioned under Chapter VIA (except 80CCD(2) and 80JJAA)
  • 80-C: LIP, tuition fees, PPF, EPF, tax-saving FDR, Repayment of home loan, mutual funds (ELSS), NSC, etc. Maximum deduction INR 1,50,000
  • 80-D: Mediclaim insurance premium, up to INR 25,000 to 1,00,000
  • 80-G: Donation
  • 80-DD: Dependent who is differently-abled, up to INR 75,000 to 1,25,000
  • 80-DDB: Expense for specified medical treatments
  • 80-E: Interest on education loan
  • 80-TTA: Interest on saving bank accounts

Old vs New Tax Regime

To understand which taxation system is best for you, let’s take an example of three people with different situations related to their expenses and investments.

  1. A salaried person, Rahul, earns INR 7,50,000 per annum, with a PF deduction of INR 10,000. He lives in rented accommodation and receives HRA from his company.
  2. Geeta earns a salary of INR 9,50,000 per annum and owns a house, for which she pays INR 82,500 as home loan interest. Her contribution to PF is INR 20,000, and she paid INR 70,000 as tuition fees for her child’s education. She also repaid INR 10,000 as a home loan.
  3. Anil gets a salary of INR 14,00,000 and pays INR 1,22,500 as interest on his home loan. He pays INR 30,000 towards PF and tuition fees of INR 90,000. His repayment towards his home loan is INR 30,000. He also pays INR 20,000 as the insurance premium of his medical insurance policy.

This is how the three cases will fair against each other when calculating taxes based on the old and new tax regime:

Details

Rahul

Geeta

Anil

Old

New

Old

New

Old

New

A. Salary Income

7,50,000

7,50,000

9,50,000

9,50,000

14,00,000

14,00,000

B. Less:-

           

Standard deduction

50,000

-NIL-

50,000

-NIL-

50,000

-NIL-

Professional Tax

2,500

-NIL-

2,500

-NIL-

2,500

-NIL-

HRA

47,500

-NIL-

-NIL-

-NIL-

-NIL-

-NIL-

LTA

-NIL-

-NIL-

15,000

-NIL-

25,000

-NIL-

C. Taxable Salary (A-B)

6,50,000

7,50,000

8,82,500

9,50,000

13,22,500

14,00,000

D. Less:- Home loan Interest

-NIL-

-NIL-

82,500

-NIL-

1,22,500

-NIL-

E. Less:- Deductions

           

80-C PF Contribution

10,000

-NIL-

20000

-NIL-

30,000

-NIL-

80-C School Tuition Fees

-NIL-

-NIL-

70,000

-NIL-

90,000

-NIL-

80-C Home Loan Repayment

-NIL-

-NIL-

10,000

-NIL-

30,000

-NIL-

80-D Medical Insurance

-NIL-

-NIL-

10,000

-NIL-

20,000

-NIL-

Taxable Income (C-(D+E))

6,40,000

7,50,000

6,90,000

9,50,000

10,30,000

14,00,000

Tax Liability

42,120

39,000

52,520

70,900

1,26,360

1,69,000

Tax Benefit

 

3,120

17,680

 

42,640

 

Old vs New Tax Regime: The Decider

There is no way to gauge which tax regime is better because of the complexity of the Indian tax regulations. On the face of it, the new tax regime looks better due to lower tax rates. However, without the benefits of standard deductions and other exemptions, the lower tax slabs can be deceiving, and you can end up paying more in taxes.

The above example clearly depicts that people with little-to-no investments should go for the new tax regime since it has lower tax slabs. However, if you have investments under sections 80C, 80D, 80G, etc., it is better to opt for the old tax regime.

So, how do you decide?

To begin with, you need to calculate the exemptions you are availing, or intend to avail, under the old tax regime. Ask yourself the following questions:

  1. Will you claim HRA?
  2. Do you have savings u/s 80C? (If you are a salaried employee, then PF and EPF savings u/s 80C are mandatory.)
  3. Do you also have other tax-free components such as LTA, food bills, phone bills, etc.?

You will have to give up all these deductions and exemptions under the new tax regime. You also cannot claim deductions against your home loan, if applicable, or insurance policies, which can significantly reduce your taxable income under the old tax regime.

Add all these deductions and exemptions to see what you will be letting go under the new regime. Subtract this total from your salary to determine your taxable salary and then calculate based on different slabs. This systematic approach should help you decide which tax regime is better for you.

Final Thoughts

The adage, the devil lies in the details, is true when comparing the differences between old and new tax regimes. While the new system has lower tax slabs, it does not offer myriad saving benefits of the old tax regime.

Therefore, it is fair to conclude that both the old and new tax regimes have their benefits and disadvantages. The old tax system encourages you to save, while the new regime is intended for new taxpayers who have less income and inevitably fewer investments.

When deciding which tax system works best for you, it is key to consider exemptions, deductions claim, donations, and investing patterns.

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