New Income Tax Slab Rates Vs Old Tax Regime | Which one is better?

Budget 2020 has sparked a new debate on which income tax slab rates are beneficial for tax assessees (New Tax Regime Vs old one).

A new income tax regime has been proposed in Budget 2020. A taxpayer can opt for it by forgoing 70 income tax exemptions.

Offering an optional lower rate of income tax to individuals, Finance Minister Nirmala Sitharaman in the Budget 2020-21 proposed new tax slabs of 15% and 25% in addition to the existing 10%, 20% and 30%.

New Income Tax Slab Rates FY 2020-21 AY 2021-22 Budget 2020
Latest Income Tax Slabs & Rates FY 2021-21 | Budget 2020

In case, you wish to claim your IT deductions and exemptions then your income will be subject to tax as per the existing (FY 2019-20) income tax rates.

New Income Tax Slab Rates Vs Old Tax Regime | Which is beneficial?

Given the fact that from Assessment Year 2021-22, a tax assessee will have to select either new tax rates or old rates, one needs to do some calculations before arriving at a decision.

New or Old rates, which one is better? – There is no straight forward answer to this question. I can present different scenarios proving the current/old tax rates is beneficial and at the same time, can present equal number of tax scenarios to prove that new tax regime is better.

So, it all boils down to ;

  • What type & quantum of Income you are receiving
  • The structure of your Salary/Income
  • Current Savings/Investments
  • Future Savings/Investments

Let’s say you are a Salaried person (type of income), has allowances like HRA (Salary structure) and claim deductions like Section 80c, 80d (health insurance) and Sec 24 (home loan). In such a scenario, you may be better off going with the old tax rates.

Let’s consider a different scenario – If you are new to the employment world or a Senior citizen (retiree) with no major tax deductions to claim (or) a salaried individual with no HRA (has a self-occupied house) and no home loan then which tax regime do you think is better? – Mostly, the new tax regime would be better.

You may this ‘compare Tax under existing and new regime’ using this official online tax calculator provided by the IT dept e-Filing portal.

As per data, as many as 5.3 crore taxpayers out of 5.78 crore claimed deductions of less than Rs 2 lakh (standard deduction, provident fund, home loan interest, contribution to national pension scheme, life insurance, medical insurance etc.) while filing income tax returns. This means that about 90% of taxpayers actually claim deduction of less than Rs 2 lakh.”

So, are we going to see the day with lower income tax rates, with no major tax deductions (or) even no deductions, as the only option in the coming Financial Years? – Probably, yes!

So, how to plan your taxes? – Simple, let’s start saving/investing/spending without the ‘tax saving’ angle. Most of the personal finance mistakes happen just to save some taxes. ‘Tax saving’ is only a value addition in your financial planning process and not the primary factor to plan your investments/savings.

But, just because there is no tax saving benefit does not mean you neglect your savings/investments. Instead, let’s concentrate on how to increase your income, how you can manage your cash-flows (budgeting) better and picking right saving/investment products as per your financial goals!.

Can you choose between existing Income tax regime and new Tax regime every Assessment year?

This will be your next logical question! Am I right?

Let’s say you file your ITR for AY 2022-23 (FY 2021-22) by opting new tax regime, is it possible to file your next AY 2023-24 ITR by selecting old tax regime (if it is beneficial to you)? What does the Finance Bill 2020 say on this?

The Budget Memorandum says, “The option shall be exercised for every previous year where the individual or the HUF has no business income, and in other cases, the option once exercised for a previous year shall be valid for that previous year and all subsequent years.”

So, a taxpayer having no business income can opt for the existing regime or the new tax regime every year upon analyzing what is more beneficial.

If you are a Tax Assessee who file ITR-1 or ITR-2, you can choose between the old and new regime (section 115BAC) every assessment year. You have to exercise your choice year year.

If you are Tax Assessee with business income, you can choose to be in the old regime for as long as you want. But, once you shift to the new tax slab, you will be given an option to withdraw only once. If you switch back to the old regime from the new regime, you cannot come back to the new regime unless your business income is zero.

Continue reading :

  1. Why you should think beyond TAX when investing!
  2. Income Tax Deductions List FY 2019-20 | List of important Income Tax Exemptions for AY 2020-21
  3. Income Tax Exemption Vs Tax Deduction Vs Tax Rebate Vs TDS | Key Differences
  4. Mutual Funds Taxation Rules FY 2020-21 (AY 2021-22) | Capital Gains Tax Rates Chart

(Post first published on : 03-February-2020)

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  • srihari says:

    good explanation

  • T B Janakiram says:

    I want to know that is there seperate exemption for Senior citizen under Sec 80 CCC,C,CB,CCD,G,etc pl guide

    • Sreekanth Reddy says:

      Dear Janakiram ji,
      Under the mentioned Sections, I dont think any separate exemptions are available for Sr citizens..

  • YESHVANT WADEKAR says:

    It is very good article

  • R.SEKHAR says:

    There is no response for the last five days..
    Is it due to Corona Virus effect…Manpower shortage…I guess..
    Expecting response and reply to my querries..
    Hope Sreekanth Reddy sir will help..

  • R.SEKHAR says:

    If we get ancestral property by the way of selling our house and our share is say Rs.10 lakhs….do we have to pay tax? Even if I am a senior citizen.If we give Form 15 H , can the tax be exempted…If not what will be the tax to be paid for a retired person with no income ..
    Pl advise..My what’s app number is 9841516218.
    Thanks and regards.
    R SEKHAR

  • Satpal Kadian says:

    Which saving will be deducted from our total income in new scheme slab of tax

  • ajay arya says:

    sir very good evening. I have gone through your blog which is very nice and informative. I am retired sr citizen retired as SM from a bank having app. income from pension and interest from FD rupees 10.91 lacs. I take benefit under section 80c 80d standard deductions and 80ttb having no housing loan. While calculating roughly my tax with both the options I presume that by investing according to latest budget I would be able to save around 7000 without any deductions. Still willing to have your opinion as to which option should I go for.

    • Sreekanth Reddy says:

      Dear Ajay ji.. It is purely your choice based on the calculations.
      If your expected tax liability is less under new tax regime then you can opt for it.

  • Arun says:

    Hi Sreekanth,

    Will epf withdrawal be taxed in future if i choose new tax regime ?

  • Vipan kumar verma says:

    OLD TAX SYSTEM IS BETTER. AS NEW SYSTEM ERADICATE JOB OF INSURANCE CO. ELSS & OTHER RELATING TO DEDUCTIONS.

  • Sharad says:

    Explanation with example would be more beneficial
    Lets consider Rs 15 Lakh income with different scenario ( Like Home loan deduction/NO deduction) .. and compare with NEw & Old system

    • Sreekanth Reddy says:

      Dear Sharad,
      Intentionally I kept this article without calculations.
      Taking couple of scenarios does not really give us clear picture and as mentioned in the above article, it does not give straight forward answer as to which one is better..

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