Old vs New Tax regime comparison for Employees

old vs new tax regime, deductions in new tax regime

The traditional Indian Direct tax system is a bit complicated. The tax rates in the old regime are high but there are a lot of exemptions and deductions which can bring down the tax liability.

In order to simplify this, a new Tax regime has been introduced from the financial year 2020-21, which may help to reduce the dependency of citizens on tax consultants and do their taxes on their own. The new tax regime comes with lower tax rates for individual and HUF taxpayers with a condition to forego certain tax deductions or exemptions.

Indian Income Tax allows employees and individuals to evaluate and choose between Old vs New Tax regime to maximise their tax savings.

Old Tax Regime – already existing tax system which will co-exist with the new tax system.

New Tax Regime – new tax system applicable from 1st April 2020 (Sec. 115BAC). It has lower tax rates but reduced exemptions & deductions as compared to old system.

Continue reading for further analysis of Old vs New Tax regime.

Income Tax Slab (Old vs New Tax regime)

Basic exemption limit in both the Tax Regimes is Rs. 2.5 lakh.

Basic exemption limit in the case of a Resident senior citizen who is 60 years or more is Rs. 3 lakhs in both the regimes.

Resident very senior citizen of the age of 80 years or more, continues to remain the same as before at Rs. 5 lakhs in both the regimes. 

Annual incomeOld tax regime slabsNew tax regime slabs
Up to ₹ 2.5 lakhsNilNil
₹ 2.5 lakhs to ₹ 5 lakhs5%5%
₹ 5 lakhs to ₹ 7.5 lakhs20%10%
₹ 7.5 lakhs to ₹ 10 lakhs20%15%
₹ 10 lakhs to ₹ 12.5 lakhs30%20%
₹ 12.5 lakhs to ₹ 15 lakhs30%25%
₹ 15 lakhs and above30%30%

Exemptions and Deductions (Old vs New Tax regime)

An exemption means a certain type of income which is not taxed at all. They are free of tax subject to certain conditions.

Deduction means certain investments or expenses which are allowed to be reduced from the income while calculating tax.

Out of 120 exemptions in the old regime, 70 have been removed in the new regime. Some important exemptions and deductions in Old vs New Tax regime are illustrated below.

old vs new tax regime, deductions in new tax regime
Salary Allowances & DeductionsOld RegimeNew Regime
House Rent AllowanceExempt (as Calculated)Taxable
Leave Travel AllowanceExempt (as Calculated)Taxable
Child Education AllowanceExempt (upto 2,400)Taxable
Food CouponsExempt (50 per meal)Taxable
Mobile ReimbursementExemptTaxable
Standard Deduction – SalaryDeductible (upto 50,000)No Deduction
Profession TaxDeductible (upto 2,500)No Deduction

House Property DeductionsOld RegimeNew Regime
Interest on Housing LoanDeductible (upto 2,00,000)No Deduction

Other Source DeductionsOld RegimeNew Regime
Family Pension DeductionDeductible (upto 15,000)No Deduction

Investments DeductionsOld RegimeNew Regime
PF ContributionDeductible (upto 1,50,000)No Deduction
ELSS Mutual FundDeductible (upto 1,50,000)No Deduction
FD of 5 Years with Bank / PODeductible (upto 1,50,000)No Deduction
Sukanya Samridhi DepositDeductible (upto 1,50,000)No Deduction
Housing Loan Re-paymentDeductible (upto 1,50,000)No Deduction
Life Insurance PremiumDeductible (upto 1,50,000)No Deduction
Tution Fees for ChildrenDeductible (upto 1,50,000)No Deduction
NPS ContributionDeductible (upto 1,50,000)No Deduction
NPS Additional ContributionDeductible (upto 50,000)No Deduction
Medi-claim PremiumDeductible (upto 75,000)No Deduction
Interest on Savings AccountDeductible (upto 10,000)No Deduction
Interest on Deposits by Senior CitizensDeductible (upto 50,000)No Deduction
Interest on Loan for Higher EducationDeductible (no Limit)No Deduction
Interest on Loan for Residential HouseDeductible (upto 50,000)No Deduction
Donations (50% allowed) Deductible (upto 50%)No Deduction
Donations (100% allowed)Deductible (upto 100%)No Deduction

Benefits of the New Tax Regime

  • Reduced Documentation –  Most of the exemptions and deductions are not available in the new Regime, which will need less documentation of deduction certificates and make tax filing simpler. In the old regime, for assessment proceedings before the tax authorities, documentation and proof of investments are required, which will be reduced in the new regime.
  • More Liquidity for Investors –  Investors would prefer having liquidity in their hands and investing in instruments which have a flexible and open-ended tenure. Investors may not prefer to lock in funds in the prescribed tax saving instruments for the specified period. Most of the tax-saving investments in the old regime have a lock-in period, before which they cannot be withdrawn. 
  • Better Choices of Investments – The investors can opt for star-rated funds, which are performing better than the tax-saving instruments specified under the old regime. Tax saving instruments are mostly risk-averse in nature and may not provide significant returns.
  • More Disposable Income –  The new regime provides for concessional tax rates as compared to tax rates in the existing or old regime. A 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.

Drawbacks of the New Tax Regime

  • No Benefit for High-Income Individuals – Considering no investments are made, the maximum benefit that can be availed under the new tax regime is Rs. 75,000 which is due to reduced tax rates for lower-income slabs. It will benefit persons in the lower-income brackets. Individuals in the higher tax bracket will not benefit much.
  • Certain tax deductions not available – The new tax regime does not allow the taxpayer to avail of certain specified deductions, which may otherwise help to better plan and reduce taxes.
  • Old Regime Promotes Savings culture – By enforcing investments to save taxes, old regime promotes the savings culture in individuals for any future eventuality like medical, education, etc. If more individuals opt for the new regime, the savings rate would decrease.

Which one to Pick? Old vs New Tax regime

It is important to inform the employer at the beginning of the financial year about opting for the new tax regime so that the employer can deduct TDS accordingly. Also for the purpose of payment of advance tax this option has to be ascertained at the start of the financial year.

Looking at the reduction in tax rates New system looks better at first, but due to the non-availability of various deductions and exemptions, the position can change significantly. A combination of exemptions and deductions can bring down the taxable income by lakhs in the Old Regime.

If a taxpayer has already taken a Home loan, then he loses major deductions in the form of interest and principal repayment on a home loan (2,00,000 + 1,50,000) in the New regime. One has to lose the exemption for House Rent Allowance too which otherwise helps to reduce the taxable income to a great extent.

Majority of the people cover risks of life and health by taking insurance policies whose deduction can only be availed in the Old regime. 

New taxation regime is better for those taxpayers who have started their careers and have fewer investments resulting in lesser deductions and exemptions.

A taxpayer having no investments or savings should go for new tax regime because of lower tax rates. However, if a taxpayer is having a home loan and other investments, then the old tax regime would be beneficial for him.

It is advisable to do a comparative calculation and analysis under both regimes, to see what works out best for each individual. There is no one-fit tax regime for all taxpayers.

Switching between Old vs New Tax regime

After opting for a tax regime, is it possible to again switch back to the previous tax regime?

Individual taxpayers can choose any regime every year which is beneficial to them, except for the Taxpayers having income from Business or Profession.

Individuals who have income from business or profession cannot switch between the new and old tax regimes every year. After opting for the new regime, they only get a single chance in their lifetime to move back to the old regime.

Further, once anyone switches back to the existing or old tax regime, he will not be able to opt for the new tax regime unless he stops earning any Business income.

Common Exemptions and Deductions in both Tax Regimes

Salary Retirement BenefitsOld RegimeNew Regime
Gratuity on RetirementExempt (upto 20,00,000)Exempt (upto 20,00,000)
Gratuity on DeathExempt (no Limit)Exempt (no Limit)
Leave Encashment on RetirementExempt (upto 3,00,000)Exempt (upto 3,00,000)
Leave Encashment on DeathExempt (no Limit)Exempt (no Limit)
VRS AmountExempt (upto 5,00,000)Exempt (upto 5,00,000)
Commuted PensionExempt (upto 50%)Exempt (upto 50%)

House Property DeductionsOld RegimeNew Regime
Municipal Taxes of House PropertyDeductible (no Limit)Deductible (no Limit)
Standard Deduction – House PropertyDeductible (upto 30%)Deductible (upto 30%)

Investment WithdrawalsOld RegimeNew Regime
PF Maturity Amount & InterestExempt (no Limit)Exempt (no Limit)
NPS Maturity Amount & InterestExempt (no Limit)Exempt (no Limit)
Sukanya Samriddhi Maturity & InterestExempt (no Limit)Exempt (no Limit)
Life Insurance Maturity AmountExempt (no Limit)Exempt (no Limit)

Tax RebateOld RegimeNew Regime
Rebate u/s 87(a)upto 12,500upto 12,500

Software for Income tax calculation

To calculate tax on salary you can use this old vs new tax regime calculator. It can be used for comparing the tax as per both regimes. Here an individual taxpayer can easily evaluate which option is better for him/her. The income tax department has also published an old vs new tax regime calculator utility.

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