Income Tax under The New Tax Regime and Old Tax Regime
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| Old tax regime vs new tax regime which is better |
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Introduction of New Tax Regime
Who is Eligible?
Benefits of New Tax Regime
Conditions of New Tax Regime
Comparison with the old regime
Analysis of Tax Liability under both Tax Regimes
Frequently asked Question answers
Introduction of New Tax Regime
A New Income Tax Regime is introduced by Finance Bill 2020 for Resident Individuals. If you are a person with no or few savings/investments to show, then a new tax regime is beneficial for you. You will find it much simpler to Save Tax and File return under the new system.
Who is Eligible?
The New Income Tax Scheme is optional and is applicable for those who do not opt to seek exemptions. The option shall be exercised for every previous year provided, the individual or the HUF has no business income, and in other cases, the option once exercised for a previous year shall be valid for that previous year and all subsequent years.
Benefits of New Tax Regime;
- Provide significant relief to individual taxpayers. Simplify the Income Tax Law.
- Provide for concessional tax rates vis-à-vis tax rates in the existing or old regime.
- The reduced tax rate would Increase liquidity in the hands of the taxpayer.
Conditions of New Tax Regime;
As in Old Tax, there are many exemptions and tax deductions available to the assessee but in the New Tax Regime, introduced by Union Budget 2020, the government removed around 70 of them. The new tax regime does not allow the taxpayer to avail certain specified deductions and exemptions
Section 10- LTC, HRA, allowance children education allowance, hostel allowance, transport allowance, etc
Section 10AA- Exemption for SEZ unit
Section 16- Standard deduction, the deduction for entertainment allowance and employment / professional tax as contained
Section 24- Interest of self-occupied or vacant property and loss under the head House Property.
section 32(1) (iia)- Additional Depreciation
Section 32AD, 33AB and 33ABA- Investment Allowances, Tea/Coffee/Rubber Business
Section 35 - Expenditure on Scientific Research
section 35AD or 35CCC- Specified Business, Agriculture Extension Project
section 57 -Family pension
Deductions under Chapter VI-A - like Section 80C to 80U
However, deduction under sub-section (2) of section 80CCD (employer contribution on account of the employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed.
Comparison with the old regime
Now Assessee has an option to select a tax regime every previous year, which one is more beneficial for him for tax purposes (provided he/she does not have business income). The following table illustrates the benefit of tax reduction against Total Income:
Analysis of Tax Liability under both Tax Regime;
[The following table is prepared by taken net income before deduction under section 80C; tax liability calculated after deduction, rebate 87A and 4% cess];
- From the above table, we can understand that there is no Tax difference Under the new and old regime when Income is Up to Rs.5 lakh.
- If Income goes up to Rs.6.5 lakh Old tax regime is beneficial because here we can exhaust our deductions and exemptions.
- When income is at Rs.8.5 lakh it seems as Breakeven point, which means tax liability in both cases is the same i.e. Rs. 54,600/-.
- After Rs. 8.5 lakh New Tax Regime is more beneficial because after this point tax liability under the new Tax Regime is less in comparison to taxability under the old tax regime.
Frequently asked Question answers:-
Which is a better old tax regime or new tax regime?
Hence after the above analysis, we can understand that assessee should analyze his income and deductions available to him before opting for any of the two-tax regimes because it differs from person to person. Overall, we can say that when income is high say above Rs. 8.5 lakh, the assessee can opt for New Tax Regime however when income is lower say Rs. 8.5 lakh assessee can opt for Old Tax Regime.
Can I switch from a new tax regime to an old tax regime?
Yes, you can switch from a new tax regime to an old tax regime at the time of filing of ITR.
How can I save tax on my new tax regime?
You can assess your tax liability under both the tax regime with the help of a Tax calculator available on the Income Tax site.
This will help you to analyze that in which option you save more tax.
Can I choose between a new and old tax regime every year?
Yes, you have the option to choose between a new and old tax regime every year before filing an income tax return.
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