Old Tax Regime v/s New Tax Regime
Choice between Normal Provisions with deductions and exemptions and New Tax Regime with lower Tax Rates: Simplified
The Budget 2020 introduced a new regime under section 115BAC giving an option to individuals and HUFs to pay income tax at lower rates. From FY 2020-21, the assessee can choose to pay income tax under an optional new tax regime.
Now the time for filing ITRs for Assessment Year 2021-22 is approaching. From this year onwards there are two options for filing ITRs. Option one is filing of ITR by claiming existing exemptions and deductions and second option is filing of ITR under new tax regime envisaged under section 115BAC where tax rates are lower. One should compare and select the one more beneficial to him or her.
New slab rates | Tax Rates | Existing slab rates | Tax Rates |
Income from Rs 2.5 lakh to Rs 5 lakh | 5% | Income from Rs 2.5 lakh to Rs 5 lakh | 5% |
Income from Rs 5 lakh to Rs 7.5 lakh | 10% | Income from Rs 5 lakh to Rs 10 lakh | 20% |
Income from Rs 7.5 lakh to Rs 10 lakh | 15% | Income above Rs. 15 lakh | 30% |
Income from Rs 10 lakh to Rs 12.5 lakh | 20% |
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Income from Rs 12.5 lakh to Rs 15 lakh | 25% |
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Income above Rs 15 lakh | 30% |
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Here an effort is made to give an overview about deductions and exemptions which are not admissible under Section 115BAC.
Income under the head of salary :-
Annual income | Tax under the existing regime (Rs) | Tax under the new regime (Rs) | Tax savings under the new regime (Rs) |
Up to Rs 7,50,000 | 65,000 | 39,000 | 26,000 |
Up to Rs 10,00,000 | 117,000 | 78,000 | 39,000 |
Up to Rs 12,50,000 | 195,000 | 130,000 | 65,000 |
Up to Rs 15,00,000 | 273,000 | 195,000 | 78,000 |
Employee receives LTC, HRA and special allowance which are exempted under section 10 of Income Tax Act under normal provisions. LTC is exempt u/s 10(5), HRA is exempt u/s 10(13A) and if you are receiving special allowances such as academic research allowance, transport grant, uniform allowance etc. which are also exempted u/s 10 of the Act. However, under section 115BAC all these allowances are taxable.
Salaried employees and pensioners are allowed standard deduction of Rs. 50,000. If you choose new tax regime under section 115BAC then standard deduction is not admissible.
Some select categories of Government employees get entertainment allowance which is also exempt to the extent of Rs. 5,000/-.
Deduction on account of Professional tax paid by employee is allowable as per normal provisions but these are not admissible u/s 115BAC.
Income from House Property. - Deduction for interest on borrowed capital for construction of house is available upto Rs. 2,00,000 under section 24(b) of the Act, however the same is not deductible as per section 115BAC. If you have self occupied house property and if there is loss under the head income from House Property the same can be set off upto Rs. 2,00,000 under other heads of income but if option of 115BAC is exercised for filing ITR then such set off benefit is not available.
If you have loss in earlier year, benefit of carrying forward of loss is also not available under section 115BAC. As per normal provisions loss incurred during the year which could not be set off under other heads can be carried forward for set off in subsequent year. However, if you switch over to new tax regime, no carry forward of loss for subsequent assessment year is available under section 71B. (Section 115BAC(2)(ii) & 115BAC(3)). However, Benefit of deduction for repairs and maintenance at the rate of 30% is available against income from house property in the new tax regime u/s 115BAC.
Income from other sources - Income which does not fall under other heads of income is chargeable under the head income from other sources which includes family pension received. Standard deduction of Rs. 15,000 is allowed under the normal provisions, however this deduction is not admissible if option of ITR filing under 115BAC is exercised.
Deductions under chapter VIA – Now, let’s analyze what happens to these deductions if you opt for new tax regime as per section 115BAC. No deductions under any provision of section VIA are allowed except employer contribution towards National Pension Scheme under section 80CCD(2).
Let us understand broadly what the deductions are available. There are many deductions under section 80C. LIC premium payment, deferred annuity, contribution to PF, pension fund, tuition fee, time deposits, housing loan repayment, senior citizen saving bank account etc. Aggregate deduction allowable upto Rs 1,50,000 u/s 80C will not be admissible to those tax payers opting ITR as per section 115BAC.
Deduction allowable under section 80CCC for contribution to certain pension fund and under section 80CCD(1) for employee’s contribution to NPS will not be admissible.
Deduction allowable for health insurance and medical expenses of individual, spouse, dependent children and parent under section 80D will not be admissible if switched over to new tax regime under section 115BAC.
Deduction allowable for expenses incurred on maintenance and medical treatment of dependent with disability under section 80DD and expenses incurred on medical treatment for specified illness or diseases under section 80DDB will not be admissible if switched over to new tax regime under section 115BAC.
Deduction allowable for higher education under section 80E will not be admissible.
Deduction for interest on loan taken for residential house under section 80EE/80EEA and deduction for purchase of Electric Vehicle under section 80EEB will not be allowable.
Deduction for donation is allowable u/s 80G under normal provisions will not be allowed under new tax regime.
Interest on Saving Bank Account is deductible upto Rs. 10,000 u/s 80TTA and upto Rs. 50,000 u/s 80TTB (in the case of senior citizens) will not be allowable under new tax regime u/s 115BAC.
Deduction u/s 80U is allowable to persons with disability under normal provisions, however no such deduction is admissible under new tax regime u/s 115BAC.
Exemption of income of minor child is allowable upto Rs. 1500 each child u/s 10(32) while clubbing income, however no such exemption is admissible under new tax regime u/s 115BAC.
Person(s) who have income under the head business and profession once opted to be governed by new tax regime u/s 115BAC then, subsequently he can opt out only once from new Tax regime and thereafter he will never be eligible to opt for the new Tax regime again except when he ceases to have any business income.
From the above discussion it is clear that new tax regime is beneficial to taxpayers who do not claim deductions and exemptions as tax rates are lower under new tax regime.
Disclaimer: Views expressed in the presentation are based on my understanding of provisions of the Income-Tax Act and rules made thereunder. Readers are advised to refer relevant law before arriving at conclusion.
By K.R. Dahiya, Former IRS officer
(Chief Advisor - Taxation, S S Singhvi & Associates)