New or old, which tax regime is better for you?

The government announced a major overhaul of the income tax structure Saturday morning. While presenting the Union Budget 2020, Finance Minister Nirmala Sitharaman announced an alteration in Income tax slab rates.

The finance minister in her second union budget provided an option to the taxpayer to pay tax as per the old slab rates or forgo all the major deduction and exemption that were available earlier and opt for the more relaxed new slab rates.

Since the announcement has been made, I have been getting a lot of queries regarding the confusion of the suitability of these two separate tax regimes. People are getting confused and are looking for clarification regarding which tax scheme is suitable for them.

Well, at prima fascia it can be said that the more exemptions an individual claims, the less likely he/she is to benefit from the new optional tax regime however which regime is beneficial will vary on a case to case basis.

The effective tax rate for individuals with taxable income up to Rs 5 lakh would be nil under both the new and the existing tax regime as these individuals would be able to avail the tax-benefit of rebate up to Rs 12,500 under Section 87A under both regimes.

Currently, income up to Rs 2.5 lakh for resident individuals (age below 60 years) is exempt from tax. Similarly, for senior citizens aged 60 years and above but below 80 years, income up to Rs 3 lakh is exempt from tax. Income up to Rs 5 lakh is exempt from tax for super senior citizens (age 80 years and above).

Before we go further on comparing the better option for you, let us look at all the prevailing Slab rates. 

1. Existing slab Rates.

Income tax slabs and rates for individuals below 60 years of age:

Taxable Income	Tax Rates and cess
Up to Rs 2,50,000 lakhs	Nil
Rs 2,50,001 - Rs 5,00,000	5% of (Total income minus Rs 2.5 lakh) + 4% cess
Rs 5,00,001 - Rs 10,00,000	12,500 + 20% of (Total income minus Rs 5 lakh) + 4% cess
Rs 10,00,001 and above	1,12,500 + 30% of (Total income minus Rs 10,00,000) + 4% cess

Income tax slab and rates for senior citizen (age 60 to 80 years):

Taxable Income	Tax Rates and Cess
Up to Rs 3,00,000 lakhs	Nil
Rs 3,00,001 - Rs 5,00,000	5% of (Total income minus Rs 2.5 lakh) + 4% cess
Rs 5,00,001 - Rs 10,00,000	10,000 + 20% of (Total income minus Rs 5 lakh) + 4% cess
Rs 10,00,001 and above	1,10,000 + 30% of (Total income minus Rs 10,00,000) + 4% cess

Income tax slab and rates for senior citizens (age 80 and above):

Taxable Incom	Tax Rates and Cess
Up to Rs 5,00,000	Nil
Rs 5,00,001 - Rs 10,00,000	20% of (Total income minus Rs 5 lakh) + 4% cess
Rs 10,00,001 and above	1,00,000 + 30% of (Total income minus Rs 10,00,000) + 4% cess

2. New slab rates introduced in finacne budget 2020.

Taxable Income	Tax Rates and cess
Up to Rs 2,50,000 lakhs	Nil
Rs 2,50,001 - Rs 5,00,000	5%
Rs 5,00,001- Rs 7,50,000	10%
Rs 7,50,000 -Rs 10,00,000	15%
Rs 10,00,000 -Rs 12,50,00	20%
Rs12,50,000 -Rs15,00,000	25%
Rs 15,00,001 and above	30%

Now that we have a view of the available options lets see which of the two option ie better for you, with the help of a few examples. 

Mr. X earns a salary of Rs. 12.5 lakhs and avails a deduction of Rs. 1.5 lakhs for PPF contribution, Rs. 50,000 towards NPS contribution and Rs. 25,000 towards the health insurance premiums. 

Details	Old Rates	New Rates
Total Income	12,50,000	12,50,000
Deductions U/s
80C	(1,50,000)	-
80CCD(1B)	(50,000)	-
80D	(25,000)	-
Total taxable Income	10,25,000	12,50,000
Tax as per slab rate	1,20,000	1,25,000
Cess @ 4%	4,800	5,000
Total tax Payable	1,24,800	1,30,000

In this case, Mr. will end up paying more tax under the new tax regime.

Now let's assume Mr.X doesn't have any of the above-mentioned deductions available. 

Details	Old Rates	New Rates
Total Income	12,50,000	12,50,000
Deductions U/s
80C	-	-
80CCD(1B)	-	-
80D	-	-
Total taxable Income	12,50,000	12,50,000
Tax as per slab rate	1,87,500	1,25,000
Cess @ 4%	75,000	5,000
Total tax Payable	1,95,000	1,30,000

In this case, Mr. X should opt for the new tax regime as it will help him save Rs. 65,000 towards his tax.

The decision will also depend upon the total income of the individual. Suppose Mr. X had a total income of Rs. 50 lakhs and avails the same three deductions of Rs. 2,25,000. In this case, he would have to pay a tax of Rs. 12.45 lakhs under the old scheme. Whereas his tax liability under the new scheme will be Rs. 12.37 lakhs and he will be able to save a tax of Rs. 7,500.

Conclusion: To see if the new regime is beneficial, each individual will have to make their own calculations. It will depend on the level of deductions and exemptions you are claiming at the moment and the level of your income.