Tax is a subject that befuddles most. Taxpayers have one, and only one motive — save tax. In the past, the Government of India tweaks the tax structure during the announcement of the budget every year.

However, Budget 2020-21 brought to the fore a new tax regime whilst retaining the older regime. With its introduction, taxpayers now get to choose one of the two regimes. But for an average Indian, choosing one over the other who is befuddled by the concept of taxes is easier said than done. 

Many tax calculators can be found online which compares both the tax regimes based on your inputs. While these will help you zero in one regime, we’re here to tell you about the basics — the differences between the two regimes, mostly. With that said, let’s get right to it.

The Tax Slabs, Similarities, and The Stark Differences

First, for the old tax regime, the deductions and tax benefits remain the same. From the table given below, you can notice that the tax rates for the new regime are comparatively lower. But there is a catch — you need to forgo certain exemptions. The exemptions you need to let go include:  

  • INR 1.5 Lakh — all investments under Section 80C
  • INR 50, 000 — standard deduction
  • INR 50,000 — NPS contribution
  • INR  10,000  — savings bank interest under Section 80TTA
  • INR 25,000 [INR  50,000 for senior citizens and parents] — medical insurance premium
  • INR 50,000 — Interest income for senior citizens under Section 80TTB
  • INR 3.5 lakh for affordable housing, INR 2 lakh for others — housing loan interest
  • INR 75,000-1 lakh — disability allowance for self or dependant
  • INR 40,000 [ INR 1 lakh for senior citizens] — treatment of dependant or self
  • House Rent Allowance (HRA)
  • Leave Travel Allowance/Concession (LTA)
  • Education loan interest
  • Donations made to specified entities
IT SlabsRate — New RegimeRate — Old RegimeSurcharge
Up to INR 2.5 lakh exemptedexempted0
INR 2.5 lakh – 5 lakh5%5%0
INR 5 lakh – 7.5 lakh20%10%0
INR 7.5 lakh – 10 lakh20%15%0
INR 10 lakh – 12.5 lakh30%20%0
INR 12.5 lakh -15 lakh30%25%0
INR 15 lakh – 50 lakh30%30%0
INR 50 lakh – 1 crore30%30%10
INR 1 crore – 2 crore30%30%15
INR 2 crore – 5 crore30%30%25
INR 5 crore and Above30%30%37

As for the similarities between the old and the new tax regimes, they are as follows:

  • Cess on health, education and the surcharge rates do not change.
  • Section 87A rebate —  For tax-paying individuals who draw an annual income up to INR 5 lakh, the tax rebate of INR 12,500 applies on the tax that is calculated.

Comparing Old and New Slab With Two Examples

Still confused about the tax regimes? Here are two cases that compare both the regimes side-by-side for two scenarios; one where the taxpayer has not made investments and the other where he has.

Case A: Taxpayer has not made any kind of investment. In this case, calculation under both regimes will be as follows:

New RegimeOld Regime
Gross incomeINR 8,50,000INR 8,50,000
Standard Deduction u/s 16(ia)0INR 2400
Employment Tax u/s 16(iii)0INR 50,000
Taxable incomeINR 8,50,000INR 7,97,600
Calculated taxINR 52,500INR 59,520
Rebate under Section 87A00
Cess + Net TaxINR 54,600INR 61,901

 

Case B: Taxpayer has made investments under Sections 80C, Section 80D, and also receives HRA. In this case, calculation under both regimes will be as follows: 

New RegimeOld Regime
Gross incomeINR 8,50,000INR 8,50,000
Standard Deduction u/s 16(ia)0INR 2400
Employment Tax u/s 16(iii)0INR 50,000
HRA u/s 10 (13A)0INR 1,00,000
LTA u/s 10(5)0INR 60,000
Exemption u/s 80C0INR 1,50,000
Exemption u/s 80D0INR 25,000
Taxable incomeINR 8,50,000INR 4,62,600
Calculated taxINR 52,500INR 10,630
Rebate under Section 87A0INR 10,630
Cess + Net TaxINR 54,6000

 

The option to switch to a new regime offers much-needed flexibility to taxpayers who can decide depending on their financial situation. The switch can be made every year for taxpayers, but the same does not apply to business owners. It is also clear that switching to the new regime might not be the best option, especially if you avail exemptions and allowances.

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Rishabh Ranjan

I have 10 years of experience in SEO, Digital Marketing, Content Marketing, and have knowledge in topics like tax, HR, Recruitment & Staffing.When I’m not doing what I do, I suit up, flick the ignition on my bike, and hit the road. But soon enough, I’m back doing what I do best — researching, writing, marketing, and optimizing the content & website.

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