New Tax Regime vs Old Tax Regime|Which is Better?

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New Tax Regime vs Old Tax Regime - Which is Better to Opt for? In Budget 2020, Ministry of Finance has introduced a new tax regime. The new tax regime is not mandatory for all the taxpayers; instead, the taxpayers are given an option to choose between the old or new tax regimes according to their suitability. Which one to Follow?

New Tax Regime vs Old Tax Regime by Tax Expert | Which One to Follow?

Introduction

New Tax Regime vs Old Tax Regime – Which is Better to Opt for? In Budget 2020, Ministry of Finance has introduced a new tax regime. The new tax regime is not mandatory for all the taxpayers; instead, the taxpayers are given an option to choose between the old or new tax regimes according to their suitability. Which one to follow?

Income Tax Information Bank by Invest Yadnya
Income Tax Information Bank by Invest Yadnya

New Tax regime Vs Old Tax Regime | Which One to Follow?

  • Many taxpayers are doubtful about the selection of the tax regime for the forthcoming financial years.
  • In this article we will understand :
    • What are the tax slab rates under the old and new tax regime?
    • Which deductions are generally claimed while calculating the taxable income?
    • Which deductions are allowed under the new tax regime?
    • 2 Options : Which Tax regime should I choose?

Tax Slab Rates as per Old and New Tax Regime

Old Tax Regime vs New Tax Regime - Tax Slab Rates
Old Tax Regime vs New Tax Regime – Tax Slab Rates

In India, we have age based Basic Exemption limit.

Age based Basic Exemption Limit
Age based Basic Exemption Limit
Rebate under section 87A

If your taxable Income is below Rs.5 Lakh, then you can avail rebate up to  Rs.12,500. However, the rebate is not available against LTCG on sale / redemption of equity shares / equity mutual funds.

How the Taxable Income is calculated?

Tax is calculated on Net Taxable Income.

Net Taxable Income
How to Calculate Net Taxable Income?
Deductions and Exemptions claimed by a taxpayer

Income Tax Department provides certain deductions upon investment / expenditure.  However, Ministry of Finance has withdrawn most of the deductions and exemption under the new tax regime. A list common allowable investments / expenditures under the new tax regime and old tax regime is given below.

Allowable Deductions & Exemptions - Old Tax Regime vs New Tax Regime
1 – Allowable Deductions & Exemptions – Old Tax Regime vs New Tax Regime
Allowable Deductions & Exemptions - Old Tax Regime vs New Tax Regime
2 – Allowable Deductions & Exemptions – Old Tax Regime vs New Tax Regime
Allowable Deductions & Exemptions - Old Tax Regime vs New Tax Regime
3 – Allowable Deductions & Exemptions – Old Tax Regime vs New Tax Regime

Which Tax Regime to opt for?

  • Here is the basic formula to decide your tax regime :
    1. Higher the amount of deductions and exemptions : Old Tax Regime is Beneficial.
    2. Lower the amount of deductions and exemptions : New Scheme is beneficial.

Let us understand with the help of the examples-

Example I

Gross Total Income of ₹ 10,00,000 and no deduction except standard deduction on salary is claimed.

Which Tax Regime to Opt for – Example I
Which Tax Regime to Opt for – Example I
Example II

Gross Total Income of ₹ 18,00,000 and he claims the total deductions of ₹ 5,00,000. The details are given below :

Deductions Claimed 
1. Interest on Housing Loan₹ 2,00,000
2. Deduction under section 80C₹ 1,50,000
3. Health Insurance Premium (Self & Parents)₹ 50,000
4. Standard Deduction against salary₹ 50,000
5. Contribution to NPS₹ 50,000
Total Deductions Claimed₹ 5,00,000

His tax liability will be calculated as below-

Which Tax Regime to Opt for – Example II
Which Tax Regime to Opt for – Example II

Our Recommendation

  • Though the deductions play a vital role in deciding the tax regime, every case is different.
  • Therefore, we recommend you to calculate your taxes every time under both the tax regimes and decide for yourself.
  • A detailed tax calculator link.

Frequently asked questions (FAQs)

1. Can I Change my Tax Regime in the same Financial Year?

Yes, we recommend to not to change the tax regime during the same financial year. This is because, now-a-days Government tracks the details as per your form 16 and amounts disclosed under your ITR. In case of any discrepancy, IT Department can issue a notice to you.
Generally, such cases can be resolved by submitting online reply to the Income Tax Department. However, all the cases cannot be resolved online.
Also, if you have claimed a refund in your income tax return, then the receipt of the refund can be delayed until the queries raised by Income Tax Department are resolved.

2. Can I Change my Tax Regime in the next Financial Year?

The taxpayers having income other than income business / profession can change the tax regime every year.
The taxpayers having a business income or professional income can change the tax regime only once.

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