New VS Old Tax Regime: Which One Should You Choose?

The Union Budget 2020-21 brought a major change for all individual taxpayers, with the announcement of the new tax regime.

With this addition, the taxpayers can now choose between:

• The old income tax regime with existing income tax deductions and exemptions.
• The new income tax regime with lower tax rates and fewer exemptions.

The big question here is which tax regime is better for you? And how can you choose between the two?

Let's start by evaluating the differences.

Difference between the rates in the two tax regimes

The new income tax regime promises lower tax rates compared to the old tax regime. Check out this table to know the tax rate for various income slabs.

Additionally, taxpayers choosing the new tax regime will have to give up the following deductions and exemptions:

(i) Leave travel allowance (LTA).

(ii) House rent allowance (HRA).

(iii) Standard deduction of ₹50,000 currently given to salaried taxpayers.

(iv) The deductions available under section 80TTA (Deduction of interest on deposits in the savings account), and 80TTB ( Deduction of interest on deposits to senior citizens).

(v) Entertainment allowance and employment/professional tax under section 16.

(vi) Housing loan interest.

(vii) Deduction of Rs 15000 allowed from family pension under section 57, clause (iia).

(viii) Common deductions under section 80C, which includes deductions claimed for life insurance premium, Provident Fund contributions, education allowance, and investments such as ELSS, NPS, PPF, etc.

(ix) Medical insurance premium under section 80D and Tax benefits for disability under sections 80DD and 80DDB.

(x) Chapter VI-A deduction except section 80 CCD(2) and 80 JJA.

(xi) Interest on education loan under section 80E.

How to choose between the new and existing tax regimes?

Can't choose between the two tax regimes? Here's a 3-step guide to help you identify a suitable tax regime.

1. Understand what's right for you

Before you get started, make sure you are well-versed with both the tax regimes and how they can impact you.

Start by evaluating the benefits you can avail in both the existing and new tax structure before choosing one of them.

Tip: If you are currently availing more deduction and exemptions under the Income Tax Act, the old regime would be more beneficial for you.

2. Identify the exemptions that affect you

A total of 70 exemptions have been let go in the new tax regime.

So, the next important step is to identify the exemptions included in your salary and evaluate how much money you could lose on choosing the new tax regime and letting go of the said exemptions.

3. Calculate your income in both tax regimes

The only way to find out the income tax to be paid is by calculating salary based on both the tax regimes to gauge the tax amount, deductions, and final salary.

You can use the Salary calculator to get a fair idea of income tax deductions in both scenarios to get a clear picture.

But how do I compare my income in both tax regimes?

Here is the potential tax amount comparison you may have to pay, assuming you claim the standard deduction of ₹1.5 lac, under Section 80C of the Income Tax Act.

1. What happens if your gross income is ₹7.5 lac?

If your income is ₹7.5 lac, you will pay a tax of ₹33,800 as per the old tax regime, and ₹39,000 per the new tax regime.

But if the gross income is ₹7.5 lac, and you don't avail the deductions, you will end up paying more in the old tax regime.

2. What happens if your gross income is ₹10 lac?

If you earn ₹10 lac, assuming you avail the deductions under Section 80C, you will pay ₹85,800 per the old regime and ₹78,000 as per the new tax regime.

3. What happens if your gross income is ₹12.5 lac?

If you are earning ₹12.5 lac, you will have to pay ₹1,48,200 as per the old tax regime and ₹1,30,000 per the new one.

(Assuming you are availing deductions under Section 80C.)

4. What happens if your gross income is ₹15 lac?

Even though the tax rate is the same for this slab in both the regimes, the amount you will have to pay may vary.

If you choose the new tax regime, you will have to pay ₹1,95,000, compared to the old regime where you will have to pay about ₹2,73,000.

If you choose to avail deductions, you would have to pay ₹1,52,880 as per the old regime, though the burden may increase on opting for the new tax regime.

5. What happens if your gross income is ₹20 lac?

If you earn ₹20 lac and choose the old tax regime, you would pay a tax ₹3,82,200 lac, but if you opt for the new regime, you will end up paying ₹3,51,000 approximately.

Is it possible to change the tax regime every financial year?

Thankfully, the answer is yes!

You can opt for different tax regimes every financial year.

Still confused about calculating the tax deductions?

If you are still confused about the income tax deductions, you can use the Salary Calculator to get a detailed salary breakup of your CTC.

The salary calculator allows you to choose between the new tax regime and the old tax regime, making it easy to find out which tax regime would be better for you.

All you have to do is fill in the details like the company name, designation, annual CTC, and experience, followed by your choice of the tax regime.

For instance, if Mr. A earns 15,00,000 and opts for the old tax regime, his salary breakup would look something like this:  

But, if Mr. A opts for the new tax regime, the details of the salary breakup would be:

Curious? You can find all you need to know in the FAQ section, right under the Salary Calculator.

So go ahead, choose well, and make an informed choice!

All the best!