Tax
With the start of the FY 2020-2021, salaried employees have been asked by their employers to declare their investments. In the Budget 2020 a new proposal was introduced regarding personal tax regime for individual taxpayers, where apart from filing investments declaration, they are also required to indicate their choice of tax regime (The Central Board of Direct Taxes issued a circular on April 13 directing all employers to obtain a declaration form employees if they wish to opt for new tax regime). Since choosing between old and new tax regime has been made optional, taxpayers are expected to be aware of the tax liability consequent to indicating their choice of regime to the company. New tax regime at concessional rate of taxes has come with the cost of foregoing certain deductions and exemptions.
Do We Have Option to Switch During the Year?
- Once choice is indicated, switching during the rest of the financial year is not possible.
- However, salaried taxpayers have the option to change the regime next financial year or at the time of filing ITR.( Note-Certain exemptions can be availed only through the employer).
- Assessee having income other than salary can’t get back to old regime, once ITR is filed under the new Tax regime.
What are the Pros and Cons of New Tax Regime
Pros
- Reduced tax rates and reduced compliances
- Need not invest in prescribed instruments for the specified period
- Flexibility of Investing as per choice
Pros
¢ Non availability of certain specified deductions
Over the years the government, through addition of clauses to the Income Tax Act, has given Indian taxpayers over 70 exemption and deduction options through which they can bring down their taxable income and hence pay less. The new tax regime does not allow the taxpayer to avail the specified deductions. Illustrative list of most commonly used deduction and exemption which is no more as per new tax regime is as follows: –
| Exemptions | Deductions |
| House Rent Allowance | Public Provident Fund |
| Leave Travel Allowance | ELSS (Equity Linked Saving Scheme) |
| Mobile and Internet Reimbursement | Employee Provident Fund |
| Food Coupons or Vouchers | Life Insurance Premium |
| Company Leased Car | Principal and Interest component of Home Loan |
| Standard Deduction | Children Tuition Fees |
| Health Insurance Premiums | |
| Investment in NPS | |
| Tuition fee for Children | |
| Saving Account Interest |
List of deductions retained under new tax regime
- Home Loan on Rented Property.
- Gratuity.
- Lump Sum Pension.
- Leave Encashment at the time of retirement.
- Interest and Maturity Amount from PPF and Sukanya Samriddhi yojna.
- Life Insurance Maturity Proceeds.
- Employer’s Contribution to NPS.
Pros and Cons of Old Tax Regime
Pros
¢ The old income tax regime has inculcated habit of saving culture in India by enforcing investments in specified tax-saving instruments, which led to savings for any future eventuality like marriage, education, purchase of house property, medical, etc.
Cons
- The tax benefits under the old regime are available on investments in specified instruments which have lock-in periods prescribed mostly for three to five years.
- Documentation and proof of investments are required to be retained and produced in case of assessment proceedings before tax authorities under old regime, which may not be required in the new regime.
What to choose?
- Both systems have their own sets of pros and cons.
- Old system has many deductions and exemptions under numerous sections.
- New system gives flexibility of investing and simplifies the process
- The answer depends upon having Investments in specified instruments or having eligible expenses admissible as per income tax act. So if the answer is yes , then Old tax regime would be beneficial, else undoubtedly New tax regime
Here the comparison of Old Tax rates & New Tax Rates as per Income Slab is given below :-
| 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% |
Comparison of Taxable amount as per New as well as Old tax regime
| Annual Income (₹) | Old Tax Rates | Taxable Amount | New Tax Rates | Taxable Amount | Benefits |
| 2,50,000 | 0% | Nil | 0% | Nil | Nil |
| 5,00,000 | 5% | Nil | 5% | Nil | Nil |
| 7,50,000 | 20% | 37,500 | 10% | 62,500 | 25,000 |
| 10,00,000 | 20% | 75,000 | 15% | 1,12,500 | 37,500 |
| 12,50,000 | 30% | 1,25,000 | 20% | 1,87,500 | 62,500 |
| 15,00,000 | 30% | 1,87,000 | 25% | 2,62,500 | 75,000 |
| 50,00,000 | 30% | 12,37,500 | 30% | 13,12,500 | 75,000 |
Note : In the above comparison chart the surcharge and education cess has not taken into consideration. The exemption / deduction are not available under new tax regime , under old tax regime exemption/ deductions are available but it is not taken into consideration because it vary from person to person . The tax calculation will vary on case to case basis depending upon the amount the assessee is investing in the tax saving option. But in general it is beneficial to opt for old tax regime for the assessee who has an annual income of upto Rs 15 Lac. You may also understand this concept from above cited examples.