Since the government has announced the new tax regime with tax slabs and lower rates, the taxpayers have been confused that whether they should switch to a new tax regime or should stick to the old tax regime which offers the benefits of deduction or exemptions in the taxes.
In the high demand of most of the taxpayers the Finance Minister “Nirmala Sitharaman” had introduced in the last year budget, a new tax regime with the feature of lower rates and tax slabs but removes the deductions and exemptions which were available in the old regime. However, there is a choice between the new tax regime and the old tax regime which a taxpayer has to choose.
What is New Tax Regime?
Under the new tax regime, every salaried individual and HUFs has the option to choose it every year as the tax is payable at lower rates for the income up to 15 lacs and the tax slab rates of the new tax regime which are applicable are 5% to 25% (in the multiple of 5). If the taxpayer opts for the new tax regime, then he/she should not take the advantage of the old tax regime such as the tax deduction and exemption. However, the taxpayers cannot avail other major benefits under this regime such as Leave Travel Assistance (LTA), House Rent Allowance (HRA) & Standard Deduction. Whereas, some other allowances are also allotted to the taxpayers for performing duties. under the Section 80C, the various deductions will not be available for both taxpayers whether the salaried or self-employed such as EPF, LIP, PPF, NCS, ELSS, Home Loan Repayment, School fee, etc, under the Section 80D which was for the health insurance premium, Section 80CCD(1) & Section 80CCD(1B) which was for the NPS (National Pension Scheme).
Features of New Tax Regime
The new tax regime which is introduced under Section 115 BAC has new key features which the taxpayer can claim. Let’s have a look at these features.
- The taxpayers can claim the daily allowance on account of absence in his/her regular place of duty so that he/she can meet the ordinary regular charges or expenditure.
- In the special case, the taxpayers can also claim the transport allowances.
- The taxpayers can also receive compensation to meet the cost of tour or travel or on transfer.
- The taxpayers can also claim the conveyance allowance to meet the convenience expenditure as part of the employment.
Tax Rates & Slab Comparison of New & Old Tax Regime
The new tax regime has done the removal of the 70 claims of tax deductions and exemptions. Therefore, the tax rates and slab comparison of the new and old regimes are shown in the table given below.
|Old Tax Slab||New Tax Slab|
|The tax slab is 5% in the income of Rs 2.5 lacs to 5 lacs||The tax slab of 5% in the income of Rs 2.5 lacs to 5 lacs.|
|20% tax in the income of Rs 5 lacs to Rs 10 lacs.||10% tax in the income of Rs 5 lacs to Rs 7.5 lacs.|
|30% tax in the income more than Rs 10 lacs.||15% tax in the income of Rs 7.5 lacs to Rs 10 lacs.|
|20% tax in the income of Rs 10 lacs to Rs 12.5 lacs.||–|
|25% tax in the income of Rs 12.5 lacs to Rs 15 lacs.||–|
|30% tax in the income more than Rs 15 lacs.||–|
Benefits of New Tax Regime
The following benefits of New Tax Regime are discussed below:
- The people with the low investment policy scheme can claim the new tax regime as it is beneficial for them by offering seven lower tax slabs. The taxpayers under the existing system can take the advantage of paying the lower upfront tax rates.
- As the Finance Minister has announced that the process and structure of the new tax regime for the taxpayers will be much easier therefore, a person will find it much simple to file tax under the new tax regime if the taxpayer is with no or little investment to show.
- It has flexibility as it is an optional scheme to switch from the existing tax regime to the new one offers better flexibility to choose the tax regime as per their requirement.
- Under the new tax regime, the misusing of the tax exemption rules has also been reduced as it helps in containing income tax frauds in the exclusion of the 70 tax exemption.
Disadvantages of New Tax Regime
Following are the disadvantages of new tax regime which are explained below:
- The people who invested a fair amount of money in tax-free saving schemes such as NPS, PPF and also claim deduction on them may suffer loss and eventually, they will have to pay more tax if they try to switch from the existing tax slab to the new one with the lower rate of taxes as there is no exemption to claim. Only if the taxpayers claim a tax deduction of Rupees up to 2 lacs can prove significant for the tax relief under the old tax regime.
- This is considered as the lower household savings as it will affect the long-term savings of an individual due to the exclusion of 70 exemptions therefore, many people refrain from investing in this tax-free scheme.
- Some experts also claim that the structure of the new tax regime may discourage the Real Estate sector’s investment as the investment in the real estate sector for Indian Households is the major tax saver and a person can also earn a high tax deduction to make the full use of it. However, under the new tax structure, there is no such exemption provided in which the real estate sector could suffer the falling demand.
- The new income tax structure has put more money and effort into the advertisement to attract people so that they can take interest in investing in it. Therefore, the insurance sector may also suffer losses as this may lead to business reduction for the insurance companies.
What are the exemption & deduction under the New Tax Regime?
The exemptions and deduction under the New Tax Regime which the taxpayers cannot claim are listed below:
- Deduction of Family Pension Income.
- The Standard Deduction.
- The professional tax entertainment allowance on salaries.
- House Rent Allowance (HRA).
- Leave Travel Allowance (LTA).
- Helper Allowance.
- Minor Child Income Allowance.
- According to Section 10 (14), other Special Allowance.
- Children Education Allowance.
- According to Section 80C, 80D, 80E, and so on except Section 80CCD(2) & 80JJAA, the deduction of Chapter IV-A.
- According to Section 24, interest on the housing loan on the vacant property or the self-occupied property.
Can I choose between the New Tax Regime & the Existing Tax Regime?
The employer cannot change the choice during the financial year anytime, they can only choose the new tax regime at the beginning of the new financial year. But at some circumstances at the beginning of the financial year, if the employee does not choose the new tax regime, then under the existing tax regime the tax (TDS) will be deducted from him. However, at the time of filling up the income tax returns the employee can change the tax regime.
Opt-in & opt-out can be done by the salaried person every year which means he can switch to the new tax regime one year and can choose the regular tax regime in another financial year and at the time of filling up the tax returns the non-salaried or business owners can switch to the new tax regime but over the time of a year they cannot intimate or declare their choice to anyone. However, if the non-salaried taxpayers once opt-in to the new tax regime, then they cannot opt-out from it again for the existing tax regime in the future.
Frequently Asked Questions
Q1. Is it better to choose the New Tax Regime?
Ans. While looking at the reduction rate of interest in the new tax regime the new system looks much better than the existing one but the removal of the 70 exemption from it may cause losses in the long-term savings as well.
Q2. Can I change my tax regime?
Ans. It is somehow easy to change the tax regime for the salaried person in one financial year at the time of filing the tax returns or filling the ITR.
Q3. Is the benefit of NPS & EPF is exempted in the New Tax Regime?
Ans. The NPS & EPF is available for the tax exemption for the financial year of 2020-21 with the maximum limit of up to 7.5 lacs and the interest earned will be taxable handy to the employee. Currently, the contribution from the employer’s basic salary towards the EPF remains 12% only.
Q4. Which parts of the EPF are taxable under the New Tax Regime?
Ans. Under the head of “Income from other sources” the interest rate of the EPF shall be taxable as the residuary income is not accruing from an employee and employer relationship source of emanating.
Q5. Is Section 80C is also available in the New Tax Regime?
Ans. Section 80C is only applicable if the taxpayer continues its existing tax regime but if he/she may switch to the new tax regime, then they cannot avail of the deduction and tax exemptions that come under 80C.