Should you file taxes under the new tax regime or the old one?

Blog:

MAS Team | 13 March 2021

In the Union Budget of 2020, finance minister Nirmala Sitharaman had announced a new concessional tax regime. The new tax regime had many more income slabs compared to the old four slabs and is supposed to reduce tax outgo.

Both the old and the new tax regime would co-exist, and tax payers have the option to choose one as per their wish and pay taxes accordingly. The new tax regime was made applicable from the financial year 2020-21 i.e. the one we are in right now. Therefore we will discuss who benefits from the new tax slabs and who is better off with the existing one.

Let us first understand the difference in the two tax regimes. In the existing tax regime there are different basic exemption limits based on the tax payers age.

If you are under 60, you do not pay any taxes on taxable income of up to Rs 2.50 lakh per year. If above 60 and under 80, the basic exemption rises to Rs 3 lakh and for above 80, the exemption is up to Rs 5 lakh.

However, the new tax regime does not have such different basic exemptions based on age. Everyone will have the same basic exemption of Rs 2.50 lakh per financial year.

Deductions: Around 70 deductions ranging from Sec 80C deductions taken on contributions to provident fund, PPF, insurance premium, to other deductions on health insurance premium, house rent, leave travel allowance, standard deduction for salaried employees, deduction on savings account interest, contributions to charity, etc will NOT be part of the new tax regime.

The only deduction allowed is Sec 80 CCD 2 which is for employer contribution to National Pension System up to 10% of salary.

Now one might assume that the new tax regime provides no advantages to reduce taxes. However, that is not the case and the decision to opt-in the new tax regime depends on the deductions you take and the income you earn.

The new tax regime looks like this:

In addition there will the 4% cess on the tax payable.

Now to make sense of the new tax regime and compare it with the existing one, we decided to find out the tax payable on different incomes under both tax regimes. In the old tax regime, we have added a few income deductions sections. These deductions are organised in sets as some may take the basic deductions and others might want to take more deductions. These are the sets:

Set 1: Sec 80C of Rs 1.50 lakh + Sec 80D of Rs 25,000 + Sec 80TTA of Rs 10,000 + Standard deduction of Rs 50,000

Set 2: Set 1 + Sec 24 of Rs 2,00,000

Set 3: Set 1 + NPS deductions Sec 80 CCD 1b of Rs 50,000 and Sec 80CCD 2 deductions of 10% of entire salary.

So which tax regime is worth it for your income and deductions?

In the table below, if one earns Rs 20 lakh and takes Set 1 deductions (80C+80D+80TTA+Std. deduction) then the tax payable will be Rs 3.56 lakh under old tax regime and will be Rs 3.51 lakh under the new tax regime without taking any deductions. Not much of a difference there.

If the same person takes all 3 sets of deductions then tax payable falls to Rs 2.15 lakh in the old regime, whereas if you take only Sec 80CCD 2 deduction under new tax regime, the tax falls to Rs 2.89 lakh.

Clearly, the more deductions you avail the old tax regime would be better.

But if you are someone who does not make any contributions to EPF, or any other major expense to save taxes on, nor has any invesment income that is taxable at slab rate, then the new tax regime is better for you.

Our suggestion is that before you commit to any products or expenses to use as deductions for income, do check out your tax liability under the new tax regime. If lucky, you may end up with more post-tax income without the need to buy tax saving products.

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