On 1st February 2020, Finance Minister announced a new tax regime under the Union Budget 2020. However, to choose the new tax regime, one must forgo the tax exemptions. Below is the table that shows the difference in the old and new tax regime for salaried individuals:

Tax Slab Old Tax Regime New Tax Regime
Up to Rs. 2,50,000 Nil Nil
From Rs. 2,50,000 - 5,00,000        5% 5%
From Rs. 5,00,000 - 7,50,000     20% 10%
From Rs. 7,50,000 - 10,00,000     20% 15%
From Rs. 10,00,000 - 12,50,000    30% 20%
From Rs. 12,50,000 - 15,00,000   30% 25%
Above Rs. 15,00,000   30% 30%

An education cess of 4% is applicable across all tax slabs under the new regime

Under the new tax slab, deductions are not applicable. List of exemptions one must forgo under the new tax slab:

  • Leave travel Allowance
  • HRA
  • Professional Tax
  • Relocation allowance
  • Standard Deduction
  • Daily expenses in the course of employment
  • Housing Loan Interest Rate
  • Conveyance
  • Deductions under chapter Vi-A; (except 80CCD (2) – NPS contribution by the employer)
  • Other deductions under different sections as prescribed

Let’s understand the new tax regime with an example, based on the below assumptions:

  • If a salaried individual is earning Rs. 10,00,000 per annum
  • He lives in his own house, hence, does not claim under HRA tax component
  • His age is below 60 years

This is how his tax would be calculated:

Particulars New Tax regime Old Tax Regime
Gross income Rs. 10,00,000 Rs. 10,00,000
Deductions Not Applicable
Deductions under Section 80C Rs. 1,50,000
Standard Deduction Rs. 50,000
Deductions under Section 80D Rs. 25,000
Home Loan Rs. 2,00,000
Taxable Income Rs.10,00,000 Rs. 5,75,000

Based on the above example, tax payable by the individual as per the tax slabs would be:

Income Tax Slab New tax rates New Tax regime Old tax rates Old Tax Regime
Up to Rs. 2,50,000 Nil Nil
Between Rs. 2,50,000 – 5,00,000 5% Rs. 12,500 5% Rs. 12,500
Between Rs. 5,00,000 – 7,50,000 10% Rs. 25,000 20% Rs. 15,000
Between Rs.7,50,000 – 10,00,000 15% RS. 37,500 20%
Total Taxes Rs. 75,000 Rs. 27,500
Cess 4% Rs. 3,000 Rs. 1,100
Net Tax payable (annually) Rs. 78,000 Rs. 28,600

In another case, if the individual is earning Rs.20 Lacs, this is how his tax will be calculated:

Particulars New Tax regime Old Tax Regime
Gross income Rs. 20,00,000 Rs. 20,00,000
Deductions Not Applicable
Deductions under Section 80C Rs.1,50,000
Standard Deduction Rs. 50,000
Deductions under Section 80D Rs. 25,000
Home Loan   Rs. 2,00,000   
Total Taxable income Rs. 20,00,000 Rs. 15,75,000
Total Tax Rs. 3,37,000 Rs. 2,85,000
Cess at 4% Rs. 13,480 Rs.11,400
Net Tax payable(annually) Rs. 3,50,480 Rs.2,96,000

This example explains that if the individual follows the old tax regime by claiming all the deductions, he will be able to save more. Since the person cannot avail any tax exemption under the new regime; he would end up paying more.

Both these examples show that under the new tax regime, a salaried class person has to pay more tax as the person has to forgo all the deductions. However, if you do not have any exemptions and find the new scheme preferable, you can opt for it.

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DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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