Should you switch to the new income-tax regime?



Still confused about the new personal income-tax regime?

Budget 2020 has given taxpayer an option to continue with existing tax regime or opt for the new proposed tax regime by forgoing exemption. The question arises whether a taxpayer can pick and choose between the two tax regimes?


Under the new, but optional, personal income-tax regime, concessional slab rates of income-tax are available for all individuals on income up to Rs 15 lakh. So, even if the income exceeds Rs 15 lakh, income up to Rs 15 lakh will be taxable at concessional rate and income over Rs 15 lakh is taxable at 30%.





However, to avail these concessional slab rates, you have to forgo a lot of exemptions, deductions and losses available as of now.


Common exemptions claimed by an individual taxpayer are tax exemption on House Rent Allowance (HRA) for rent paid by an individual or exemption on Leave Travel Assistance (LTA). Similarly, common deductions claimed by an individual taxpayer include standard deduction on salary (flat Rs 50,000), deduction under Section 80C for investment in PF, PPF, LIC premium (up to Rs 1.5 lakh) or deduction under Section 80D for medical insurance premium. If an individual does not pay house rent but instead pays interest on housing loan, such interest loss can be set off against salary income (up to Rs 2 lakh).


Under the new regime, you have to forgo these various exemptions, deductions and losses, which means that your gross income is taxable at the new slab rates.

Individuals who avail of various exemptions, deductions and losses currently may be better off continuing under the current regime. However, an individual who does not pay house rent, does not have a housing loan and does not avail many other exemptions or deductions may opt for the new regime.


(An example to illustrate this):


Mr A has gross salary income of Rs 15 lakh. He does not avail any exemptions or deductions currently. By only availing standard deduction of Rs 50,000, his current annual tax bill is Rs 2,57,400. He is better off under the new regime as he will save tax of Rs 62,400.


Mr B also has a gross salary income of Rs 15 lakh but he makes various investments towards PF, PPF, etc. and avails full deduction of Rs 1.5 lakh under Section 80C. His current tax bill is Rs 2,10,600. He is also better off under the new regime as he will save tax of Rs 15,600.


Mr C, with gross salary of Rs 15 lakh, stays in a rented house and claims tax exemption on HRA in addition to standard deduction and Section 80C deduction. His current tax bill is Rs 1,17,000 with a tax exemption on HRA amounting to Rs 3 lakh. Mr C is better off continuing under the old regime as his tax liability will increase under the new regime by Rs 78,000 after forgoing current exemptions and deductions.


Mr D, with gross salary of Rs 15 lakh claims only standard deduction (Rs 50,000), Section 80C deduction (Rs 1.5 lakh) and Section 80D deduction (Rs 50,000). His current tax bill is Rs 1,95,000 with total deductions of Rs 2.5 lakh. Mr D is neither better off nor worse off under the new regime as his tax liability will remain the same under the new regime even after forgoing current exemptions and deductions.


Chart Showing illustrative tax calculation in new tax regime

The maximum tax saving under the new regime will be for a self-employed individual not claiming any exemption or deduction or loss. For such an individual, the tax saving will be Rs 75,000 plus applicable surcharge and education cess.

If your gross salary is Rs 15 lakh or higher and you avail standard deduction and various other exemptions and deductions amounting to more than Rs 2.5 lakh, you may be better off continuing under the current regime.


Now, let’s consider an individual with a salary of Rs 30 lakh. If the individual was claiming only standard deduction of Rs 50,000 and house property loss of Rs 2 lakh (due to housing loan interest on self occupied property), the individual is neither better nor worse off under the new regime. However, if the individual is also claiming Section 80C deduction of Rs 1.5 lakh and Section 80D deduction of Rs 50,000, the individual is better off under the current regime. At various income levels, you are better off continuing under the current regime if you are availing exemptions, deductions and losses of more than


One argument in favour of the new regime is the flexibility it gives you in not having to invest in “prescribed modes” under Section 80C in order to save taxes. It admittedly leaves an extra amount available for immediate consumption (or for investing elsewhere). While that may give an immediate boost to private consumption and demand, is it wise from the individual’s standpoint to spend more and not save, especially considering the lack of an adequate social security safety net in our country?

Feel free to reach us for any discussion or any query in this topic



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