New Tax Regime
Budget 2020 brought in the proposal for a new tax regime. This article helps understand the pros and cons of the new regime and decide on whether it is beneficial for the taxpayer.
The new regime holds the benefit of reduced tax rates, but with a condition – taxpayers cannot enjoy the exemptions and deductions available under the existing tax regime. Consider, for instance, if a taxpayer claims tax exemptions and deductions of up to Rs 3 lakhs in a year, inclusive of a standard deduction of Rs 50,000, the new regime will not allow claiming these benefits. Exemptions like HRA and housing loan interest also cannot be claimed under the new regime. This may prove unattractive for individuals who had opted for home loans to mitigate taxes, and those investing in insurance & mutual funds over a period of time.
Employees are advised to calculate and understand which regime works for them, depending on the deductions and exemptions they wish to claim.
Claimable Deductions and Exemptions
Under the new regime, almost 70 deductions and exemptions have to be foregone.
Contributions made to Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) will not reap tax benefits under Sec 80C, but interest amount and maturity proceeds are exempted under the new regime.
The new tax regime allows deductions under Sec 80CCD (2) of the Income Tax Act, 1961, which are applicable if the employer contributes to an employee’s NPS account. The maximum deduction an employee can claim is 10% of total salary. However, under the new regime, the employer’s contribution to NPS, superannuation fund, and EPF has been capped at Rs. 7.5 lakhs.
One of the major deductions removed in the new regime is tax benefit on interest paid on the home loan. However, it applies only to home loans on a self-occupied property. For taxpayers who have taken a loan on a property and rented it out, interest can be deducted under Sec 24(b) even under the new regime.
An employee is eligible to avail gratuity from his employer after working in the same organization for more than five years. As per the Income Tax laws, a gratuity of up to Rs 20 lakh in a lifetime is tax-exempt in private organizations. The taxation rules for gratuity remain the same under the new regime.
According to the Income-Tax rules, one-third of the lump sum pension / commuted pension will be tax-exempt for the employees of private organizations if gratuity is received. If not received, half of the lump sum pension will be tax-exempt. This rule remains the same under the new regime as well.
Income tax rules state that leave encashment of up to 3 lakhs is tax-exempt, and this is retained under the new regime.
Tax benefits on life insurance premium under Sec 80C will not be available under the new regime, but maturity proceeds from the policy will continue to be exempt from tax under Sec 10 (10D).
|Tax Slab||Old Tax Slab||New Tax Slab|
|0 – 2,50,000||0%||0%|
|2,50,000 – 5,00,000||5%||5%|
|5,00,000 – 7,50,000||20%||10%|
|7,50,000 – 10,00,000||20%||15%|
|10,00,000 – 12,50,000||30%||20%|
|12,50,000 – 15,00,000||30%||25%|
|15,00,000 & above||30%||30%|
Under the new regime, income ranging from Rs 5 lakhs to Rs. 7.5 lakhs would be taxed at 10%, while income ranging from Rs 7.5 lakhs to Rs 10 lakhs would be taxed at 15%. Under the existing tax regime, this was 20%. The earlier Rs 10 lakh + slab which was taxed at 30%, has been split into three, namely 20% for Rs 10 lakhs – Rs. 12.5 lakhs, 25% for Rs 12.5 lakhs – Rs. 15 lakhs and 30% for Rs 15 lakhs and above.
The new regime for senior citizens
The old tax regime offers a higher tax-exemption limit for senior citizens (taxpayers aged above 60 years and below 80 years) and super senior citizens (taxpayers aged above 80 years). Such relief is not offered under the new regime, which considers every citizen as equal.
Informing the employer on choosing a new tax regime
Through a declaration form, an employee should inform the employer of moving forward with the new regime. The employer will start to deduct TDS monthly. This declaration form is applicable for the entire Financial Year 2020-21. Those who have not informed the employer will continue to be taxed as per the old regime.
Is it possible to switch the tax regime while the financial year is going on for TDS purposes?
Once a taxpayer decides to opt for a particular tax regime, he/she cannot switch over again during the rest of the financial year. However, the taxpayer has the right to choose whether to employ the option or not, at the time of filing the return.
A salaried taxpayer can choose the new regime in one year and can opt for the old tax regime in another year. A non-salaried taxpayer can choose the new regime at the time of filing the tax return.