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New Tax Regime Vs Old Tax Regime

To simplify the filing of Income Tax Returns and to make it easier for general public to manage their taxes as well as filings themselves, Budget 2020 introduced a New System of Taxes applicable from financial year 2020-2021. The New Tax Regime aims to simplify tax computations and in a way promotes the DIY (Do IT YOURSELF) approach for planning of Taxes, Investments & Filings.

But does this simplification actually benefits you?

Taxpayers have the option to select between New Tax Regime and Old Tax Regime.

New Tax Regime on one hand has reduced tax rates but on the other hand has done away with many deductions and rebates.

If I opt for the New Tax System I will not be entitled for various deductions & exemptions like Standard Deduction from salary, PPF, Mediclaim insurance, house loan interest, HRA, LTA...........and many more. This list of allowances that will not be eligible is quite long and actually cosists of around 70 exemptions and deductions.


We are well aware of Nitty Gritties of existing/old Tax System which we are following for years. What we need to  understand is the outcomes if opted for New System.

I have tried to bring out some practical issues that may be faced by tax payers while opting for any one system.

Common issues that  may be faced while deciding about which option to select
 

I opted for new system while declaring to my employer. Now if I want to switch to the older scheme will it be allowed? How to switch from one scheme to other when my employer do not agree to switch the option during the year?

If you opted for new scheme to your employer, the TDS on your salary will be at the rates as per the NEW System. It will be difficult to for employers to finalise TDS figures if they let the employee switch from option to other. However employee can himself switch from one option to other at the time of filing his/her Income Tax Return. You can finalise your taxes according the the system more beneficial to you and accordingly can claim refund or pay due taxes at the time of filing your Return.

Is it right that Existing System will be more beneficial in all cases?

No its not like that. No doubt existing system will be more beneficial if you have a certain amount of tax saving investments/allowances/rebates. The amount of investments however depends upon the corresponding amount of income. If you do not have any exemptions/deduction to be claimed then New regime will surely be more profitable.

Still I can say that if Total income is ₹15.00 lacs or more then eligible investment of more then ₹ 2.50 lacs will definitely make tax liability lower under existing regime as compared to New Regime with no benefit of many deductions.

Similarly if Total income is ₹10.00 lacs then eligible investment of around ₹ 2.00 lacs will definitely make tax liability lower under existing regime as compared to New Regime.

Simply put if your total Investment is more then ₹ 2.50 lacs, then whatever your income be, you will be better off under the existing system of Tax.

A study about Investments if opted for New Tax System
Selecting New system means no need to lock funds in specified investments with specified lock in periods. Now any investment which suits my risk and return criteria can be opted for. So now the funds earlier booked only for tax saving investments will be free for investments of own choice.

The new system however removes that compulsory savings part. Without having it for saving taxes, many people will be postponing or avoiding savings. Atleast investments worth  1,50,000 were done by most income group to save taxes. Ultimately that much of investment woked as savings. But under New Regime that savings part will be missed by many.
Is it allowed to Switch from one Tax Regime to other?

Tax payers not having income from business and profession can opt every year about whichTax Regime they will follow for that year.They can switch from one option to other in the following year.

However in case of income from business & profession the choice of switching between old and new system can not be exercised every year. If New System is opted, they can go back to old regime just once. And once opted for switching back, they will not be allowed to switch back to new regime.

Who should opt for New System and who should remain in the existing System?

To be precise its better to calculate tax under both options and opt for the system more profitable.

To generalise in most cases for salaried people It wont be of any benefit to go for New System as the allowances of HRA, LTA, Standard Deduction, Entertainment Allowance and then LIC, PPF,  mediclaim and many more; which if totalled will be in lacs will not be allowed as deduction.

Comparison of both Tax Options with some examples:
Its good that new system is not forced on anyone. A simpler version of taxes in the form of New System is introduced as an option for taxpayers. Its now for us to decide as to which system is more beneficial to us.

For any income group there will be an investment amount upto which tax liability will be same under both the regimes. Investments/rebates/exemptions beyond that will bring tax liability down under Old System & below that will mean lower tax liability under new system.



A comparitive study of the tax payable under both the scenarios taking different amount of investments but keeping the income same:

From the example below Its very clear that for Annual Income of ₹15,00,000, tax payable in new system is ₹ 1,95,000 and in old system is  ₹ 1,95,000 considering  Investment amount of ₹ 2,50,000.

We can say that for annual income of  ₹ 15,00,000; ₹ 2,50,000 is the amount of investment with which tax liability in old system is same as in new system. Investments less then this will make New System favorable and investment more then this will make old system favorable.


Same amount of income with different amount of eligible savings for an individual of an age lower then 60 years.

Gross Income of  ₹ 15,00,000
Tax savings of  ₹ 2,50,000
Tax liability (including 4% cess) under New and Old System will be

New System
 Old System
Total Taxable Income
15,00,000
12,50,000
Tax Payable
1,95,000
1,95,000

Gross Income of  15,00,000
Tax savings of  ₹ 1,50,000. 
Tax liability under New and Old System will be
Total Taxable Income  15,00,000 13,50,000
Tax Payable 1,95,000
2,26,200

Gross Income of  15,00,000
Tax savings of  ₹ 3,50,000
Tax liability under New and Old System will be
Total Taxable Income 15,00,000
11,50,000
Tax Payable 1,95,000
1,63,800

This is just to explain that New System will be beneficial if tax saving allowances and investments are not much. Ultimately I would suggest to calculate various allowances and investments already done and then decide by calculating tax under both the options.

It would be my pleasure to here from you for a feed back or for a query. So do write to me at arpita@tdsmaster.com


Quick links:
Tax Rates both New & Existing for FY 2020-21
Standard deduction from salary of Rs. 40000/-...read in detail...
 

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