The Finance Minister has most eloquently announced the Budget 2020, in her poetic 160-minute speech. The Budget 2020 has given the taxpayer an option to choose between the new tax regime and the old tax regime, as the finance minister calls them. The connotation of “old” in old tax regime gives people the wrong idea and hints unconsciously the attempt of the government to shift the people to the “new” tax regime. However, one must remember, there are two tax regimes now, “Option 1” and “Option 2” both of which are equally valid.
What are the two options that taxpayers have?
Option 1 – Old tax regime – Continue existing regime with deductions and exemptions
Option 2 – New tax regime – Shift to regime with no deductions and no exemptions
Given just the above two options, it is without doubt that the people would choose the old tax regime. So how does the government make new tax regime appealing for the people?
By reducing the tax rates under the new tax regime.
| Income tax slabs | Old tax regime Tax Rates | New tax regime Tax Rates |
| 0 – 2.5 lakh | Exempt | Exempt |
| 2.5 – 5 lakh | 5 | 5 |
| 5 – 7.5 lakh | 20 | 10 |
| 7.5 – 10 lakh | 20 | 15 |
| 10 – 12.5 lakh | 30 | 20 |
| 12.5 – 15 lakh | 30 | 25 |
| 15 lakh and above | 30 | 30 |
*Budget has retained full tax exemption for both regimes up to 5 lakhs under 87A
Factors to consider about the new tax regime?
To understand this, we must consider two factors:-
- What is the income and which slab does one fall under?
- What are the deductions and exemptions that one can claim?
Normally, an individual avails three most important exemptions, standard deduction of Rs. 50,000 for salary, deduction under Section 80C of Rs. 1,50,000 for provident fund contribution, life insurance premium, school tuition fee for children, ELSS, PPF etc. and medical insurance deduction of Rs. 50,000 under Section 80D, all of which are not allowed as deductions under the new tax regime.
New tax regime does not allow following deductions –Standard deduction: Rs 50,000, House rent allowance, Housing loan interest: Rs 3.5 lakh for affordable housing, Rs 2 lakh for others, Investments under Sec 80C: Rs 1.5 lakh, Leave travel allowance, NPS contribution: Rs 50,000, Medical insurance premium: Rs 25,000 (Rs 50,000 for parents and senior citizens), Savings bank interest: Rs 10,000.
All deductions under chapter VIA (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) will not be allowed and these are a part of 70 deductions and exemptions.
So, if you are a salaried employee who pays life insurance or children’s tuition fee or provident fund contribution and medical insurance, your income in new tax regime is Rs. 2,50,000 more.
Which tax regime to opt for?
People would definitely choose the regime which allows them to pay less taxes. Therefore, let’s take examples to understand tax effects in both regimes.
X is an average 35 to 40-year-old resident Indian, who earns salaried income. X pays life insurance, school fees for his children. The cumulative of above is 80C deduction of Rs. 1,50,000. X also pays for medical insurance for his family Rs. 50,000 and is eligible for deduction under 80D.
Example 1 – If X’s income is 5 Lakhs, what is tax effect under both regimes?
| Income Tax Calculation | Old tax regime Tax Rates | New tax regime Tax Rates |
| Annual Income | 5,00,000 | 5,00,000 |
| Standard Deduction of salary | -50,000 | -0 |
| 80 C | -1,50,000 | -0 |
| 80 D | -50,000 | -0 |
| Taxable Income | 2,50,000 | 5,00,000 |
| Tax effect | 0 | 0 |
| No difference |
Example 2 – If X’s income is 10 Lakhs, what is tax effect under both regimes?
| Income Tax Calculation | Old tax regime Tax Rates | New tax regime Tax Rates |
| Annual Income | 10,00,000 | 10,00,000 |
| Standard Deduction of salary | -50,000 | -0 |
| 80 C | -1,50,000 | -0 |
| 80 D | -50,000 | -0 |
| Taxable Income | 7,50,000 | 10,00,000 |
| Tax effect | 65,000 | 78,000 |
| Tax saving of Rs. 13,000 in old tax regime |
Example 3 – If X’s income is 15 Lakhs, what is tax effect under both regimes?
| Income Tax Calculation | Old tax regime Tax Rates | New tax regime Tax Rates |
| Annual Income | 15,00,000 | 15,00,000 |
| Standard Deduction of salary | -50,000 | -0 |
| 80 C | -1,50,000 | -0 |
| 80 D | -50,000 | -0 |
| Taxable Income | 12,50,000 | 15,00,000 |
| Tax effect | 1,95,000 | 1,95,000 |
| No difference |
Example 4 – If X’s income is 20 Lakhs, what is tax effect under both regimes?
| Income Tax Calculation | Old tax regime Tax Rates | New tax regime Tax Rates |
| Annual Income | 20,00,000 | 20,00,000 |
| Standard Deduction of salary | -50,000 | -0 |
| 80 C | -1,50,000 | -0 |
| 80 D | -50,000 | -0 |
| Taxable Income | 17,50,000 | 20,00,000 |
| Tax effect | 3,51,000 | 3,51,000 |
| No difference |
Once you opt for the new tax regime, can you go back to the old tax regime?
Yes, every year you can go back and forth the two regimes. However, individuals having business income cannot switch to old tax regime once they choose the new tax regime.
Bottomline
As observed from the examples cited above, talking the basic deductions into account the old tax regime is equal or better than new tax regime. Thus, if I were to rate the old tax regime and the new tax regime out of 10, I would say that the new tax regime is a 7 and the old tax regime with basic deductions is also a 7, but can go up to 10 if planned properly.
Planning and Analysis –
- In these uncertain times, families can consider buying medical insurance and availing 80D deduction benefit.
- Since interest rates are down and recession is looming, one can consider buying fixed interest return life insurance and availing 80C deduction benefit, a basic life insurance analysis will show that they give better return than bank fixed deposits and given the current banking situation one would be safer with insurance backed by IRDAI.
- As interest rates are low, and the real estate sector is taking a hit, now is also the right time to buy apartments as one can negotiate with top realty companies for good homes for reasonable prices and buy them backed with low interest housing loans. The housing loans sanctioned after 2019-20 are eligible for an additional deduction of Rs. 1,50,000 under Section 80EEA.
- The Government announced that any donation to PM CARES fund is eligible for 80G donation. The government has also announced that under the new tax regime you are not eligible for deductions. Thus, any deduction under the PM CARES fund is not eligible for deduction under the new tax regime. PM CARES goes hand in hand with the old tax regime.
- Budget 2020 is applicable w.e.f. for AY 2021-21 (April 2020 to March 2021). One has ample time to plan one’s taxes.
Since every individual has been given an option, one must plan their taxes wisely by considering several factors. Given the fact that new notifications are coming out almost every other day, an average Indian would be not be able to answer the question of New vs. Old tax regime? The right person could only be, in my honest opinion, an updated Chartered Accountant.
I conclude with a quote from our Finance Minister, “I feel most of us are underestimating Indian taxpayer. If he has money in his hand, he is the best judge where he wants to put it — whether to save it or spend it on a house or vehicle or insurance,”.
