As we all aware that Income Tax is levied upon an individual on the basis of different tax rates for various Income Tax slabs. When everybody was expecting relief in tax rates and hoping for new exemptions and extra deductions, then Finance Minister by Union budget 2020 came up with a new tax structure having low rates of taxes for Individual taxpayers with a condition that the person opting for this new scheme has to forego all his deductions and exemptions.
After knowing this, everybody is confused that whether the old tax regime is helpful for them or a new tax regime is helpful in order to reduce their tax liabilities. Moreover, People are also confused about that tax Scheme.
So, In this article, we are going to compare old and new tax system by which most of your doubts will be resolved and you will be able to figure out yourself that which tax scheme is more beneficial to you. So, Let’s start the discussion of both the schemes one by one:
Old Income Tax Scheme:
According to the previous or Old Income Tax scheme, Individuals have been further categorized into three slabs on the basis of their age limits.
- Resident as well as Non-Resident Individuals below the age of 60 years ( Having basic exemption from Income is Rs. 2,50,000. )
- Resident Individuals or Senior citizens having age between 60 to 80 Years (Having Basic Exemption limit from Income is Rs. 3,00,000 )
- Resident Individuals of more than 80 years i.e. Super senior citizens ( Having Exemption Limit from Income is Rs. 5,00,000)
So, as we know the major change in old, as well as the new scheme, is regarding their different Tax slabs. So, first, we will look into tax slabs under the old Income Tax scheme so that we can compare both the schemes. So, here we are discussing tax slabs for Normal Individual of below 60 Years of age:
Note: If total income is up to Rs. 5,00,000 then rebate from tax under section 87A is available up to Rs. 12,500.
In the old Income tax scheme, one can also claim various Deductions under chapter VI A. If we talk about salaried employees then they also enjoying various benefits of exemptions like basic exemption of Rs. 50,000 from salary, House Rent Allowance, etc.
This is what we had in the Old Income Tax scheme. Now, let’s discuss what the government came up with a new scheme for taxpayers.
New Income Tax Scheme:
As per the new Income Tax scheme, there is a change in Income Tax slabs for Individual Taxpayers which are much lower than tax rates in the old Income tax system discussed above. But there is a condition, if a taxpayer wants to adopt for new tax rate system then he must forego all the deductions and exemptions he is claiming in the old tax system. This is the same as govt give us some and make us lose some in order to get that benefit. So, let’s have a look over new Income Tax rates introduced in Budget 2020:
NOTE: Rebate from Tax up to Rs. 12,500 Under section 87A if Income is up to Rs. 5 Lakhs is also available in the New Income Tax scheme.
After having look over these tax rates, it must seem to you much more attractive than the previous ones due to much less income tax rates than the previous scheme. But as we said earlier that there is a much more strict condition then its benefit, we need to forego all exemptions and deductions in order to get benefitted from these new tax rates.
It means that if we are getting benefit from low tax rates but also, on the other hand, we need to get our taxable income increase by foregoing our deductions and exemptions and which may overall result in results in the loss by opting new scheme. Now a question may arise on your mind that what are the various deductions and exemptions which one needs to forego to opt for this tax system. So, here is the list of the general deductions and exemptions which will not be available to the taxpayer opting for these low tax rate system:
Exemption and Deductions need to forego:
- Standard Deduction of Rs. 50,000 ( Applicable for Salaried Individuals )
- House Rent Allowance
- Investments under Section 80 C ( up to Rs. 1.5 Lakhs )
- Leave Travel Allowance.
- Saving Bank Interest Deduction ( Section 80TTA and 80TTB )
- Contribution to the National Pension Scheme (up to Rs. 50,000).
- Deduction under Section 80G (Donation to specified entities)
- Professional Tax
- Other special allowance as specified under section 10(14).
- All other deductions under Chapter VI A (Except Deduction under section 80CCD(2) and Section 80JJA).
Here are various other exemptions also which left untouched by budget 2020 which means, there are various exemptions also by which one can get benefitted even after opting for New tax system. Some of these exemptions are:
- Agriculture Income is still exempted without any limit.
- Retrenchment compensation and Voluntary Retirement Scheme proceeds (Rs. 5 Lakhs each )
- Standard Deduction of 30% in case of Income from House Property.
- Leave encashment on retirement.
How to Choose between Old and New Income Tax Scheme:
We can choose any of one Tax scheme before the due date of filing of return of Assessment Year 2021-22. As discussed above there is benefit and loss both in the new tax scheme. Which one is beneficial is depends upon several factors like Total Income, Deductions and exemptions can be availed, etc.
Tax calculators are made available online at various professional websites to check which scheme is beneficial for them. The income tax department also made available the tax calculator to calculate the tax to be levied in a new scheme so that taxpayers can choose a beneficial option for them.
There are many scenarios, let’s say if one is having savings and exemptions available then it has been observed that Old scheme is beneficial for them as even there is high tax rate but reduced overall income due to these deductions and exemption reduce the overall tax burden on the assessee.
On the other hand if one is not saving anything and no exemption is available with him, then, in that case, there is a new scheme that is beneficial as it has reduced the tax rate.
After discussing both the old and new tax systems, as per our observation old scheme is beneficial in most cases. As we know most of the deductions under chapter VIA are not available in the new scheme which is claimed by almost all the individuals, so there is not any sense to opt for the new scheme and forego all those benefits available for us. Every individual especially the salaried individual is eligible for Rs. 50,000 deduction without any investment, moreover HRA is also claimed by many of the salaried taxpayers. So, if we keep all these points in mind and we have available exemptions and deductions to claim then there is no sense to opt for a new scheme and forego all those benefits.