Difference Old Tax Regime vs New Tax Regime

The Finance Minister, Nirmala Sitharaman had presented the Budget 2020 on the 1st of February 2020. Finance Minister had many major announcements including the changes in the current tax regime with respect to tax slab rates and other major changes.

In order to simplify taxes and remove the dependency of citizens on tax consultants, the FM has introduced a new tax regime. The new regime comes with reduced income tax slab rates and the removal of rebates and exemptions.

The new tax regime is available only to individuals and HUF. Also, as of now, individuals/Hindu Undivided Family can choose between the old tax regime and the new tax regime in the upcoming Assessment Year. The major difference between both of these tax regimes is income tax slab rates as well as the ability to claim exemptions and deductions.

Old & New Tax Slab Rates

Under the New Tax Regime, new tax slabs have been introduced with existing rates which are slashed on income up to INR 15 Lakh. The tax slab rates as per the ‘New Income Tax Regime’ and ‘Old Income Tax Regime’ are as follows:

Income Range Rates as per Old Tax Regime Rates as per New Tax Regime
Up to INR 2,50,000 Nil Nil
INR 2,50,000 – 5,00,000 5% 5%
INR 5,00,000 – 7,50,000 20% 10%
INR 7,50,000 – 10,00,000 20% 15%
INR 10,00,000 – 12,50,000 30% 20%
INR 12,50,000 – 15,00,000 30% 25%
Above INR 15,00,000 30% 30%

Moreover, The Finance Minister announced that under the new tax regime, the basic tax exemption limit will remain the same for all assesses including the senior citizens. Therefore, in case you opt for the new regime, there will be no higher tax exemption for the senior and super senior citizens.

Age New Regime Exemption Limit Old Regime Exemption Limit
People Below 60 Years of Age INR 2,50,000 INR 2,50,000
People Between 60 to 80 Years of Age INR 2,50,000 INR 3,00,000
People Above 80 Years of Age INR 2,50,000 INR 5,00,000

The comparison can also be understood with the help of below chart:

Changes in Deductions and Exemptions under the New Tax Slab

According to the announcement made in the Budget 2020, there have been major removals of tax exemptions and deductions. This has made tax compliance less tedious. Here is the list of what deductions have stayed and what deductions have been removed:

What is not covered in New Tax Regime What is covered in New Tax Regime

Leave Travel Allowance 

Income from Life Insurance

House rent allowance

Money received as a scholarship for education, etc.

Standard deduction of Rs 50,000 that was available for salaried individuals

Leave encashment on retirement

Deductions available under Section 80TTA/TTB

Agricultural Income

Entertainment allowance deduction and professional tax ( For government employees)

Standard Deduction on Rental Income

Tax relief on interest paid on home loan for self-occupied or vacant property u/s 24

Retrenchment compensation

Deduction of INR 15000 allowed from family pension

VRS proceeds up to INR 5 lakhs

Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) (Except, deduction under Section 80CCD(2)

Death cum retirement benefit

Changes under Income from House Property in the New Tax Slab

Changes in Deductions on Home Loan interest – Section 24(b)

No claim of home loan Interest on Self Occupied House Property: Individuals who have taken a home loan on their self-occupied property and are paying interest on it, can not claim that interest deduction under Section 24(b).

A claim of home loan Interest on Rental House Property: Under the new income tax regime, individuals can claim interest on home loans for let-out property only up to the amount of their rental income declared under the head house property income.

The setting off of losses from house property income

As per the new income tax regime, losses from house property can only be set off against other income from house property. Moreover, losses from income from house property cannot be carried forward in the new income tax regime.

Deduction for first-time Homebuyers

Deduction u/s 80EE & Section 80EEA gives relief on interest paid on home loans for first time home buyers. This deduction is no longer available for taxpayers following the new income tax regime.

Deductions for business expenditure under New Tax Slab

Following deductions and exemptions not allowed for business income:

  1. Additional depreciation under section 32.
  2. Investment allowance under section 32AD
  3. Sector-specific business deductions under section 33AB and 33ABA
  4. Expenditure on scientific research under section 35
  5. Capital expenditure under section 35AD
  6. Exemption under section 10AA for SEZ units

Setting-Off Business/Profession Loss

In the case of a business income, an individual/ HUF cannot set-off the brought forward business loss or unabsorbed depreciation. Further, they cannot carry forward these B&P losses and unabsorbed depreciation relating to deductions/exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC.

In simple terms, you can carry forward short-term & long-term capital losses, derivatives trading losses in the new tax regime. Since, only the losses relating to deductions & exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC cannot be set off or carried forward, for eg: House property losses, additional deprication, etc.

If an individual/HUF opts for new tax regime for FY 2020-21, then form 10-IE has to be filed to inform the tax department that one is choosing the new tax regime. As per the income tax laws, an individual having business income shall submit this form before the due date of filing ITR i.e. July 31 (unless extended by the government). For salaried individuals, the form can be submitted before/at the time of ITR filing, even if ITR is filed after the due.
Tip
If an individual/HUF opts for new tax regime for FY 2020-21, then form 10-IE has to be filed to inform the tax department that one is choosing the new tax regime. As per the income tax laws, an individual having business income shall submit this form before the due date of filing ITR i.e. July 31 (unless extended by the government). For salaried individuals, the form can be submitted before/at the time of ITR filing, even if ITR is filed after the due.

Comparison of Old and New Tax Slab

There cannot be a straight answer to the question that which tax regime is better to opt for. It depends on each taxpayer’s situation and financial position.
Looking at the reduction in tax rates new system looks better but due to non-availability of various deductions or exemptions, it is advisable to do comparative evaluation and analysis under both the regimes before you opt for the new regime or decide to continue with the old one.

Here are some examples of how much tax a person must pay in the old and new regime without any exemptions for the same salary.

ITR for Salaried Individuals
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ITR for Salaried Individuals
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A PERSON WITH AN ANNUAL INCOME OF INR 7,50,000

Suppose a person is having income of INR 7,50,000 which includes INR 3,50,000 from Salary, INR 2,00,000 is profit from trading, INR 50,000 is from Interest on FDs and remaining INR 1,50,000 from Rental Income

Income Old Regime Tax Rate Old Regime Tax Amount New Regime Tax rate New Regime Tax Amount
Up to INR 2,50,000 0% 0 0% 0
From INR 2,50,000 – 5,00,000 5% INR 12,500 5% INR  12,500
From INR 5,00,000 – 7,50,000 20% INR 50,000 10% INR 25,000
Total Tax   INR 62,500   INR 37,500
Cess 4% INR 2,500 4% INR  1,500
Annual tax payable   INR 65,000   INR 39,000

However, if the person earning INR. 7,50,000 claims some exemptions, the tax liabilty will change accordingly-

Deduction Deduction Amount Old Regime Tax Amount with Exemptions New Regime Tax Amount
Standard Deduction INR 50,000    
Section 80C Deduction INR 1,50,000    
Section 80D Deduction INR 20,000    
Net Taxable Amount   INR 5,30,000 INR 7,50,000
Total Tax   INR 18,500 INR 37,500
Cess 4%   INR 740 INR 1,500
Net Tax Payable (annually)   INR 19,240 INR  39,000

A PERSON WITH AN ANNUAL INCOME OF INR 10,00,000

Suppose a person is having income of INR 10,00,000 which includes INR 6,00,000 from Salary, INR 2,00,000 is profit from trading, INR 50,000 is from Interest on FDs and remaining INR 1,50,000 from Rental Income

 

Income Old Regime Tax Rate Old Regime Tax Amount New Regime Tax rate New Regime Tax Amount
Up to INR 2,50,000 0% 0 0% 0
From INR 2,50,000 – 5,00,000 5% INR 12,500 5% INR  12,500
From INR 5,00,000 – 7,50,000 20% INR 50,000 10% INR 25,000
From  7,50,000 to INR 10,00,000 20% INR 50,000 15% INR 37,500
Total Tax   INR 1,12,500   INR 75,000
Cess 4% INR 4,500 4% INR  3,000
Annual tax payable   INR 117,000   INR 78,000

However, if the person earning INR. 10,00,000 claims some exemptions, the tax amount will change accordingly-

Deduction Deduction Amount Old Regime Tax Amount with Exemptions New Regime Tax Amount
Standard Deduction INR 50,000    
Section 80C Deduction INR 1,50,000    
Section 80D Deduction INR 20,000    
Net Taxable Amount   INR 7,80,000 INR 10,00,000
Total Tax   INR 68,500 INR 75,000
Cess 4%   INR 2,740 INR 3,000
Net Tax Payable (annually)   INR 71,240 INR  78,000

Moreover, Tax on incomes taxable at special rate such as long term and short term capital gains will be same in new as well as old tax regime.

Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
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Income Tax Calculator
Calculate income tax liability for FY 2020-21. Compare tax liability as per New vs Old Tax Regime.
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This table below can give a broad idea about tax slab based on income range:

Pros & Cons of New Tax Regime

  • The pros of the new regime are as follows:
    • Reduced tax rates and compliance: The new regime provides for concessional tax rates. Further, as most of the exemptions and deductions are not available, the documentation required is lesser and filing tax is simpler.
    • No need to lock-in funds in the prescribed instruments for the specified period: 
      • Under the new regime, the benefit of deduction/allowances would not be the criteria 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 can invest in open-ended mutual funds/instruments/deposits, which provides them good returns as well as the flexibility of withdrawal as well.
    • Increased liquidity in the hands of the taxpayer: 
      • 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.
    • Flexibility of customizing the investments: 
      • The existing tax regime restricts the investment choices for the taxpayer as they have to make the investments only in the instruments specified. However, the new regime provides taxpayers with the flexibility of customizing their investment choices.
  • The cons of the new regime are as follows:
    • Non-availability of certain specified tax deductions: 
      • The new tax regime does not allow the taxpayer to avail certain specified deductions.
    • Discourages the ‘Savings’ Culture:
      • Since investment schemes will not provide any tax benefits under 80C.

FAQs

Can I choose a new tax regime at the time of filing ITR, if I have opted for the old tax regime with my employer?

If an individual who has opted for old tax regime with his/her employer for TDS on salary, plans to opt new tax regime at the time of filing ITR, then he/she can do that by filling the new form i.e. 10-IE.”

Can I opt out of New Scheme once opted in?

An individual having salaried income and no business income has the option to choose between the old and new tax regimes every year i.e. he/she can switch regimes from year to year.
However, individuals having business income are not eligible to choose between the new and old tax regime every year. Once they have opted for the new tax regime, they only have a one-time option of switching back to the old tax regime in their lifetime.
Once they switch back, they will not be allowed to opt for new tax regime again.

What if I forget to fill the new form?

If an individual forgets to fill the new form i.e. Form 10-IE, at the time of filing ITR, then he/she may be disallowed the tax rates available under the new tax regime. The tax department will calculate his/her income tax liability based on the existing/old tax regime.

I have incurred short-term and long-term capital losses. Also, I have losses from trading in derivatives. Can I carry forward those in the new tax regime?

Yes, You can carry forward short-term and long-term capital losses as well as loss from trading in derivatives in the new tax regime because only the losses that relate to deductions/exemptions withdrawn in clause (i) of sub-section (2) of section 115BAC cannot be set off or carried forward.

I am having two rented house properties. Can I claim interest on a loan taken for one property against rental income earned from both of them under the new tax regime?

Yes, you can claim interest deduction against rental income earned from both of them under the new tax regime.