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Come tax season, any of us earning an income in India scramble to file our IT returns and pay liable income tax. Depending on the level of income earned in a year, the government has made tax slabs, which is the percentage of income tax liable to taxpayers.As the income increases, so does the amount of tax payable. However, in the financial year 20-21, the government announced a new tax regime with different tax slabs and different rules for tax deductions. But instead of making the new tax regime completely mandatory, the government allows one to pay taxes according to the old tax regime if it’s more favourable to the taxpayer.
What is the New Tax Regime? (When was it introduced)
The new tax regime was introduced in the financial year 20-21. The new tax regime changed the tax slab configuration by effectively reducing the liable tax to the various income slabs. But the flipside is that some tax deduction benefits were removed from the new tax regime.For example, in the old regime, taxpayers earning between Rs 5 to 10 lakhs per annum were liable to pay 20% of income tax . In the new regime, the tax slab is further divided, and taxpayers earning Rs 5 to 7.5 lakhs are liable to pay 10%, and Rs 7.5 to 10 lakhs must pay 15% income tax, respectively. Thus, we can see that the tax rates have been considerably reduced.The tax slabs according to the new regime are as follows:
| Income Tax Slab | Slab rates for New Tax Regime |
| Rs 0.0 – Rs 2.5 lakhs | 0 |
| Rs 2.5 lakhs – Rs 3.00 lakhs | 5% |
| Rs 3.00 lakhs – Rs 5.00 lakhs | |
| Rs 5.00 lakhs- Rs 7.5 lakhs | 10% |
| Rs 7.5 lakhs – Rs 10.00 lakhs | 15% |
| Rs 10.00 lakhs – Rs 12.50 lakhs | 20% |
| Rs 12.5 lakhs – Rs 15.00 lakhs | 25% |
| >Rs 15 lakhs | 30% |
The reduction in tax is favourable, but there is another aspect to it. Certain deductions or exemptions are allowed when you pay your income taxes. For example, income from agriculture is exempt from tax. An example of a deduction is your health insurance premium, which you can deduct from your total taxable income and get a reduced tax outgo.The new tax regime has removed some of these benefits for the taxpayers. Here are some significant exemptions and deductions that the new tax regime no longer allows:
- Standard deduction of Rs 50,000 for salaried individuals
- House Rent Allowance
- Leave Travel Allowance
- Section 80TTA/TTB deductions
- Tax deduction on the interest component of home loans
- Tax-saving investments like 80C, 80D, and others under Chapter VI-A
What is the Old Tax Regime?
The old tax regime had the following tax slabs:
| Income Tax Slab | Applicable Income Tax |
| Up to Rs 2.5 lakhs | 0 |
| Rs 2.5 lakhs -Rs 5 lakhs | 5% |
| Rs 5.00 lakhs– Rs 10 lakhs | 20% |
| > Rs 10.00 lakhs | 30% |
As is evident, the tax applicable is significantly higher than the new regime. However, the old tax regime allows for many more tax exemptions and deductions.All the exemptions and deductions that are not allowed in the new regime, as mentioned above, are allowed in the old regime.
Old vs. New Tax Regime: Which One to Pick?
The government has given the taxpayers an option to choose which regime they want to follow. It gives taxpayers the flexibility to choose what is best for them. The answer to the question of which regime to follow between old and new tax regime is not as straightforward and is different for taxpayers based on their incomes and deductions.To find out the best regime for you specifically, it is important to calculate your tax liability for both regimes and then choose the one where your tax liability is lesser. Get your chartered accountant to calculate your total tax outgo in both regimes, and then you can make an informed choice.For some taxpayers who do not make use of many deductions and exemptions, the new regime may be more beneficial. However, for others, the older regime may be better.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.