It is the responsibility of every citizen of India to pay taxes diligently and regularly. The tax rates, exemptions and deductions are applicable for individuals and institutions as per the Income Tax Act of 1961. The finance ministry of India reviews the prevalent tax system and declares changes in it on a regular basis to ensure greater efficiency. The Budget 2020 thus brought a new set of changes to the old tax regime, introducing new income tax slab rates, reducing the number of exemptions and deductions, and so on. A taxpayer can choose to pay tax via the old tax regime or under the new tax regime. Are you wondering what are the key differences between them both and which one should you choose? This article is here to help you out.
Old vs. New: Income tax slab rates
The old tax regime had four tax slabs with income tax rates ranging from 0% to 30%. The new tax regime has created further categories with seven tax slabs that range from 0% to 30% as well.
The tax rate of 5% for individuals with an annual income of Rs 2.5 lakhs to Rs. 5 lakhs continues to be the same under the new regime. Under the old tax regime, individuals with an annual income of Rs. 5 lakhs to Rs. 7.5 lakhs have to pay income tax at the rate of 20%. The new tax regime has reduced the tax rate for this slab to 10%. For individuals earning Rs 7.5 lakhs to Rs 10 lakhs annually, the old tax regime mandated the payment of income tax at the rate of 20%. The new tax regime has reduced the same to 15%. Under the old tax regime, individuals earning Rs. 10 lakhs and above have to pay income tax at the rate of 30%.
New tax slab rates introduced
The new regime has devised new income tax slab rates for individuals earning between Rs. 10 lakhs and Rs. 15 lakhs. Individuals earning in the range of Rs. 10 lakhs to Rs. 12.5 lakhs will have to pay income tax at the rate of 20%. Those in the annual income range of Rs. 12.5 lakhs to Rs. 15 lakhs will be paying income tax at the rate of 25% while individuals earning Rs. 15 lakhs and above annually will be paying income tax at the rate of 30%.
If you are looking for assistance in understanding how much tax you may have to pay in regard to your income tax slab and other factors, then you should take the help of an income tax calculator.
Old vs. New: Exemptions and deductions
The other major difference between the two regimes lies in the exemptions and deductions each of them allows. While the old tax regime allows the taxpayer to opt for tax deductions and get exempted from tax by paying, investing, and spending on a variety of instruments, the new tax regime has significantly reduced such procedures.
Under the old tax regime, one could opt from a list of 120 exemptions given that the prescribed conditions were met. However, the ministry found that many of the procedures were burdensome and led to complications within the tax system. Hence, it came to a decision to remove around 70 of them to ensure smoother efficiency.
Exemptions and deductions allowed in the old tax regime (but not in the new tax regime)
- Leave travel allowance
- Allowance for children’s education
- Standard deduction of around Rs. 50,000 on salary
- House rent allowance
- Deduction on entertainment allowance and professional tax (for government employees only)
- Tax deductions and breaks on several investment options
Exemptions and deductions retained in the new tax regime
- Income received from life insurance plans
- Retirement leave encashment
- VRS proceeds of up to Rs. 5 lakhs
- Death/retirement benefit
- Retrenchment compensation
Kindly note that these are not exhaustive lists. Exemptions and deductions can be obtained by filing the ITR on time. There are various types of ITR one can opt from depending on factors such as total income, source of income, and the category of the taxpayer you fall under. So, before you begin your tax saving journey, do remember to go through the types of ITR and select the one most appropriate for you.
While an income tax calculator is a highly useful tool, it is recommended to consult a tax expert to get a more nuanced perspective on tax-related matters