Old Vs New Income Tax Regime : Budget 2020 : With Downloadable Excel

As if the existing Income Tax and Return filing was a child's play, here comes two different tax regimes to choose from - Old Vs New. 

To top it, there is no one definitive answer. 

Every individual tax payer has a different story to share, depending on the income tax bracket, exemptions and deductions you claim or intend to claim. 

Let's see the merits and demerits in each regime, and then try out our hands with real data..

What has happened?

The 2020 Budget (FY 2020-21) has proposed a New Tax Regime in addition to the existing, i.e. Old Tax Regime. However the New Tax Regime is optional. To put it simply, the assessee can choose between the New Tax Regime and the Old Tax Regime depending on what is best suitable from a tax planning point of view.

Unfortunately, there is no single answer to this puzzle. And the culprit again is the complexity of the Indian tax rules. 

Key difference between the Old and the New Regime

There are two key differences between the Old and the New Tax Regime:

1/ Tax Rates

The new tax regime gives an impression of lowering your overall taxes by splitting the slabs further, and providing lower taxes in some cases.

Here is the tax rates comparison between the old and new tax regimes:

2/ Treatment for 'Deductions' and 'Exemptions'

This is where the catch is.

There are more than 100 tax exemptions and deductions that are provided by the government in the old tax regime to arrive at your taxable income. 

If you wish to avail the lower tax structure of the new regime, you will have to give away most of them - including all your Sec 80 C exemptions.

Key Deductions that you will need to forego in the new regime

- Leave Travel Allowance (LTA)

- House Rent Allowance (HRA)

- Special allowance detailed in Rule 2BB (such as children education allowance, hostel allowance, transport allowance, per diem allowance, uniform allowance, etc.)

- Allowance for clubbing of income of minor

- Standard deduction

- Home Loan Interest under section 24 in respect of self-occupied or vacant property

- Any deduction under chapter VI-A (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.)

- The above includes all exemptions on Life Insurance Premiums, Tuition Fees for kids, PF/PPF investments, Health Insurance, Donations etc.

Key Deductions that can still be claimed in the new regime

- Deduction under sub-section (2) of section 80CCD (employer contribution on account of employee in notified pension scheme)

- Section 80JJAA (for new employment)

How will TDS from Salary be deducted

1/ Employers will have to deduct TDS from salary for FY 2020-21 as per the tax regime - new or old - chosen by the employee. 

2/ If an employee wants to go for the new tax regime he/she must inform the employer.

3/ By default, TDS would be deducted as per the old regime tax rates.

4/ Once the choice of tax regime has been communicated to the employer, the employee cannot change the choice of tax regime during the financial year. 

5/ An employee will have the option to switch the tax regime at the time of filing tax return (ITR).

6/ If the communication of tax regime to the employer happens in the middle of the year, then the new tax regime will be followed for the remainder of the year. Example, If you communicate your choice of new tax regime to your employer in the month of June, then TDS from June till the end of the financial year will be deducted as per the new tax rates subject to any adjustment for excess TDS deducted for April and May which can be made by the employer.

7/ If you opt for new tax regime for deduction of taxes from salary, then remember your Form 16 will not have details of all the tax-exemptions and deductions that you may be eligible to claim if you opt for the existing/old tax regime at the time of filing ITR. You will need to keep your own track.

Benefits of New Tax Regime

1/ Reduced tax rates

The new regime provides for concessional tax rates vis-à-vis tax rates in the existing or old regime.

2/ Reduced compliance

As most of the exemptions and deductions are not available, the documentation and preparation required is lesser and the tax filing is easier.

3/ Promotes Liquidity

Investor may not prefer to lock-in funds in the prescribed instruments like PPF, ELSS for the specified period.

4/ Increases in hand income

The reduced tax rate would provide more disposable income to the taxpayer, who could not invest in specified instruments due to certain financial or other personal reasons.

Benefits of Old Tax Regime

1/ The old tax regime, by enforcing investments in specified tax-saving instruments, over the period, inculcated the savings culture in individual and led to savings for any future eventuality like marriage, education, purchase of house property, medical, etc.

2/ India's gross savings rate was approximately 30 per cent in March 2019 and domestic savings by individuals is a significant contributor to the overall savings rate. If more individuals will opt for the new regime, the savings rate would decrease, nevertheless the consumption cycle and demand would be revived.

How many times we can choose a tax regime

1/ The choice can be exercised every year and any regime which is beneficial can be adopted by the individual tax payer.

2/ Individuals who have income from business or profession cannot switch between the new and old tax regimes every year. If they opt for the new taxation regime, such individuals get only one chance in their lifetime to go back to the old regime. Further, once switched back to existing tax regime, they will not be able opt for new tax regime unless their business income ceases to exist.

Try it Out Yourself (Downloadable Excel)

There is nothing like trying your own hands to see which regime will save more taxes for you. 

Here is the link for : Downloadable Excel to calculate your own Taxation on both Regimes

Making your choice

In light of the above and considering the new income tax regime wherein certain deductions and exemptions would not be applicable if taxpayers opt for the concessional new tax regime, they may evaluate both the regimes. 

A taxpayer who is looking for flexibility in investment choices and does not want to invest in the specified eligible instruments, may consider opting for the new tax regime. However, it is advisable to do a comparative evaluation under both regimes, before opting to continue with the old one or opting for the new one.

Be careful what you wish for, there’s always a catch ~ Laurie Halse Anderson

Regards

Manoj Arora

Official Website