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%.

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)