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January 31, 2021

Old or New Tax regime Which is favourable for FY 2020-21?

by CA Shivam Jaiswal in Income Tax

Old or New Tax regime Which is favourable for FY 2020-21?

The budget 2020 saw the finance minister Nirmala Sitaraman announce a new tax regime with more tax slabs and lower tax rates. This was long demanded by most taxpayers, however, the option for this concessional tax regime came with a cost, it required the taxpayer to forego certain specified deductions. To add to this confusion, the finance minister gave taxpayers a choice between the new regime and existing one, leaving it to them to decide which they would like to opt for. In this article, let us look at the new regime in detail, its benefits and compare it to the existing tax system.

Tax Slab Rates in Old and New Tax Regime

Income Tax SlabOld DateNew Rate
Up to Rs 2.5 lacks
Rs 2.5 lacks to Rs 5 lacks5%5%
Rs 5 lacks to Rs 7.5 lacks20%10%
Rs 7.5 lacks to Rs 10 lacks20%15%
Rs 10 lacks to Rs 12.5 lacks30%20%
Rs 12.5 lacks to Rs 15 lacks30%25%
Rs 15 lacks and above30%30%

What deductions are not allowed in the new tax regime?

  • Deductions under Chapter VI-A – Such deductions under sections 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EEA except those under 80CCD(2) and 80JJAA
  • Interest incurred on home loan (Section 24b)
  • LTC (Section 10(5))
  • HRA (Section 10(13A))
  • Allowance on income of minor (Section 10(32))
  • Standard deduction from Salaries (Section 16)
  • Exemption to SEZ (Section 10AA)
  • Additional depreciation (Section 32(1)(iia)
  • Deduction from family pension (Section 57iia)
  • Section 32AD/33AB/33ABA (Investment in new Plant & Machinery in notified backward areas, Tea development Account, Site Restoration Fund)
  • Section 35/35AD/35CCC (Expenditure on Scientific Research/Expenditure on Agriculture extension project}
  • Not allowed to set off losses from earlier assessment years due to above mentioned deductions or loss under the head ‘’Income from house property’’
  • In case of Individual or HUF having no business Income, option to opt for old vs new shall be exercised for every previous year before filling return of income.

What deductions can one claim if they switch to the new tax regime?

One can claim the following deductions even if they opt for the new tax regime:

  • Deduction u/s 80CCD(2) –Employer contribution to your pension account
  • Deduction u/s 80 JJAA –additional employee cost
  • Transport allowance for differently abled persons.
  • Conveyance allowance for performance of duties.
  • Allowance given for cost of travel/tour
  • Daily allowance given under certain conditions.

Let us understand the same with the help of an example:

 Old Tax RegimeNew Tax Regime
Annual Income     2,000,000.00       2,000,000.00
(-) Less  
Standard Deduction          50,000.00
Deduction u/s 80C        120,000.00
Contribution to NPS          20,000.00
HRA          50,000.00
Health Insurance premium paid under Section 80D          20,000.00
Leave Travel Allowance (LTA)          30,000.00
Net Taxable Income     1,710,000.00       2,000,000.00
Tax on Above  
Up to Rs 2.5 lacks                         –                             –  
Rs 2.5 lacks to Rs 5 lacks          12,500.00            12,500.00
Rs 5 lacks to Rs 7.5 lacks          50,000.00            25,000.00
Rs 7.5 lacks to Rs 10 lacks          50,000.00            37,500.00
Rs 10 lacks to Rs 12.5 lacks          75,000.00            50,000.00
Rs 12.5 lacks to Rs 15 lacks          75,000.00            62,500.00
Rs 15 lacks and above          63,000.00          150,000.00
Total Tax        325,500.00          337,500.00

Which tax regime should a taxpayer opt for?

Before opting for a tax regime, one has to consider the following points:

  • The new regime provides for concessional tax rates vis-à-vis tax rates in the existing or old regime. Further, as most of the exemptions and deductions are not available, the documentation required is lesser and tax filing is simpler.
  • However, new tax scheme is beneficial to only those taxpayers who have not invested in various tax saving schemes and also not salaried employee enjoying HRA etc.
  • Old scheme is suited to middle income group having sufficient investments in various tax saving schemes.
  • Under the new regime, all taxpayers would be treated at par and benefit of deduction/allowances would not be a criterion for availing the tax exemption.
  • This may be helpful for those categories of taxpayers who may not subscribe to the specified modes of investments, as most of the investments have a lock-in period, before which it cannot be withdrawn.
  • They could invest in open-ended mutual funds/instruments/deposits, which provides them good returns as well as flexibility of withdrawal as well.
  • For instance, certain eligible instruments have a longer lock-in period such as fixed deposits with banks and post offices have a lock-in period of five years, equity-linked savings schemes (ELSS) is for a period of three years, National Savings Certificates (NSC) for five years, etc.
  • 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.
  • The old income 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.

In light of the above and considering the new income tax regime, wherein certain deductions and exemptions would not be applicable, if taxpayers want to 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 and analysis under both regimes, to see what works out best for you, before opting to continue with the old one or opting for the new one.

The choice can be exercised every year and any regime which is beneficial can be adopted by the individual (except for those who have income from business or profession). 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 you switch back to existing tax regime, you will not be able opt for new tax regime unless your business income ceases to exist.

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