Comparison: New Income Tax Regime V/S Old Regime

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Every year on 1st February our Honorable Finance Minister presents the Union budget for the coming financial year and its applicable assessment year. On 1st February 2020, our finance minister honorable Nirmala Sitharaman has presented the budget 2020 in which many changes announcements have been incorporated along with its objectives that are to be achieved.

As far as the Indian Economy is concerned, it accounts for more than 50% in the service sector, so it's a bit natural that most concentrating topic of the budget will be Income tax head “Salaries”. 

Also, Budget 2020 has made changes that give the individual taxpayer a sense of worry as to whether their tax liability from now on will be increased or decreased.

New Tax Regime:

The new tax Regime under the Budget has offered individual taxpayers the concessional tax rates and simultaneously the slabs have also increased.
First, let us see the new Tax slabs introduced in this Budget and how it is different from existing Slabs.

Annual Income
Tax Rate – New Regime
Tax Rate – Existing Regime
Up to 2.5 lakhs
2.5 lakhs to 5 lakhs
5 lakhs to 7.5 Lakhs
7.5 lakhs to 10 lakhs
10 lakhs to 12.5 lakhs
12.5 lakhs to 15 lakhs
Above 15 lakhs

The concessional tax rates above introduced in the new regime. However, certain deductions like Standard Deduction of 50,000, deductions under 80 C which are popular in old tax structure is no longer be available if individual taxpayers opting the new scheme. The option is in the hand of the individual taxpayers.

Exemptions Not Available in New Scheme:

As discussed above, taxpayers need to forego the deductions if they are opting for the new tax regime. Some of the deductions given below which will not be allowed in the New Regime:

1. Standard Deduction- Rs 50,000
2. HRA (House Rent Allowance) – Depends on salary structure and Rent paid
3. LTA
4. NPS contribution: Rs 50000
5. Investments under Section 80C
6. Medical Insurance Premium - Rs 25,000
7. Savings Bank Interest Rs 10,000 under section 80TTA
8. Interest Income for Senior citizens under section 80TTB
9. Donations to specified Entities
10. Educational loan interest - If paid for eight consecutive years

Exemptions Which Are Still Available:

Following is an illustrative list of exemptions that are still available for individuals opting new regime.

1. Standard Deduction on rent – 30% of rent received
2. VRS Proceeds – Rs 5 lakhs
3. Agricultural Income – No limit
4. Leave encasement on retirement: Rs 300,000

Seeing Tax rates in new as well as old schemes, list of exemptions that can be availed and which can’t be availed, salaried person is now confused as to which scheme to opt.

Here is the solution to this. If any salaried person is claiming deduction of above Rs 2.5 Lakhs, he or she is not benefited from a new tax scheme.

Pros and Cons of the New Scheme

It's evident to note that the new tax structure left the taxpayer into dilemma as to which scheme to opt. following are some pros and cons:

1. Pros in the New Scheme:

(i) Reduced Paperwork and Compliances: As compared to the old regime most of exemptions are not available, so there is no documentation required for claiming exemptions.

(ii) Reduced Tax Rates: Clear from the above table, slabs have been widened and increased to six and rates also have been decreased.

(iii) Increased “Cash in Hand”: As there is no need to need of investment for claim deduction, there is increased liquidity in the hands of an individual taxpayer.

(iv) Flexible Choices for Investment: AS in case of the old regime, 80C requires the notified investments only along with specifies lock in periods, but in case of the new regime no boundary for investments’.

2. Cons of the Old Scheme:

(i) Not Major Exemptions Available: This is the only major problem with the new scheme.

Pros and Cons of Existing/Old Scheme

1. Pros of Old Scheme:

(i) An increased habit of Savings: In the existing scheme people have no option but to save for future events like marriage, purchase of property, education, etc.

(ii) India’s Gross savings rate will increase if there are more savings and investments.

2. Cons of Old Scheme:

(i) Specified Lock in Term/period: Specific instruments if invested, there is a specified lock-in period for 3 to 5 years. This means there would not be enough liquidity.

(ii) Documentation: If any assessment proceeding arises, there is huge paperwork and documentation required.

Making a Choice:

In light of the above pros and cons in both the schemes, it can be concluded that it is advisable to do a comparative evaluation for both the schemes before continuing with the old one and opting for the new one. Also, one good thing choice can be exercised every year for individuals (but not for individuals who have income from business or profession).

Any Taxpayer who wants flexibility in the choice of investments wants liquidity of cash, reduced paperwork can opt for the new scheme.

It is important to note that the Income Tax Department has brought tax comparison utility which is available at their web portal, to evaluate which option suits best.

Link -

Written by - Utkarsh Samaiya

Edited by - Adrija Saha

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