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On 1stFebruary 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.Ready to make the most of your money? Start your tax planning journey now!
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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