New vs Old Taxation Regime – A Detailed Analysis

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New vs Old Taxation Regime – A Detailed Analysis

 

In India, the tax rates are on a higher edge. Most people end up paying a significant portion of their earnings in taxes. This is especially applicable for the salaried class. There are multiple avenues provided under the income tax act to allow deductions to such taxpayer that reduces the net taxable income. However, many taxpayers aren’t able to take advantage of these beneficial provisions.

Therefore, in order to provide relief to such taxpayers, the government introduced New Taxation Scheme under Section 115BAC in Budget 2020. Popularly known as the ‘New Taxation Regime’ or the ‘New Taxation Scheme’, this scheme focused on the reduction of tax rates that especially benefited the middle class. This is undoubtedly a small step toward a big change.

A small step because this new regime is optional. Yes! It can be opted by the taxpayers on their will. The Ministry of Finance has now shown interest in simplifying the income tax laws and pulling out taxpayers (and the government itself) from the jargon-heavy tax structure.

So, what is this income tax new regime? Is it better than the old tax regime? Who will reap the benefit? Is there any disadvantage caused due to its introduction into tax law? Let us find out.

What is the New Tax Regime?
Basically, the new tax regime is getting rid of numerous tax benefits on certain transactions (be it investments, expenses, or income) and giving the benefit of lower tax rates. Following is the tax rate comparison between the new and old tax regimes:

Total Income

Tax Rate under New Regime as per Section 115BAC*

Tax Rate under Old Regime*

0 - 2,50,000

NIL

NIL

2,50,001 – 5,00,000

5%

5%

5,00,001 – 7,50,000

10%

20%

7,50,001 – 10,00,000

15%

10,00,001 – 12,50,000

20%

30%

12,50,001 – 15,00,000

25%

Above 15,00,000

30%

 

*The above tax rates are subject to applicable surcharge and cess

Above was the comparison between old and new tax regime slabs. When we go through this table, we understand that the assesses who have their income between Rs. 5,00,000 and 15,00,000 will be able to reap the benefit of the new tax regime. (Wait! What about the deductions that could have reduced your taxable income in case of the old taxation regime?)

Disallowances Under the New Taxation Scheme

While the old taxation regime allowed various deductions to the taxpayers, this will have to be sacrificed if the taxpayers opt for the new taxation regime. These disallowances include:

  • Standard deduction up to Rs. 50,000 available to a salaried person
  • HRA or House Rent Allowance
  • Interest expense claimed on self-occupied housing property loan
  • Leave Travel Allowance
  • Chapter VI-A deductions (i.e., Section 80C, 80D etc. except Section 80CCD(2) and Section 80JJAA)
  • Additional Depreciation under Section 32(1)(iia) 
  • Deductions under section 32AD, 33AB, 33ABA, 35(1)(ii), 35(1)(iia), 35(1)(iii),35(2AA), 35AD, 35CCC
  • Deduction on interest on saving account deposit.
  • Entertainment allowance for government employees.
  • Family pension deduction allowed under section 57
  • Minor child income allowance
  • Helper allowance
  • Children education allowance
  • Any special allowance or benefit, not in the nature of perquisite, that is exempt under section 10(14)
  • Daily allowance received by MLAs or MPs
  • Any allowance received by MPs
  • Constituency allowances received by MLAs
  • Exemptions to SEZ units under section 10AA
  • Professional tax deduction

Further, no set-off shall be allowed for the brought forward losses or depreciation if they pertain to the above deductions. Further, the losses under the head ‘Income from House Property’ shall not be allowed to be set off against any other income.

How to Select the New Taxation Scheme?
Any individual or HUF desirous of opting for the new taxation scheme under Section 115BAC can do so by filing Form No. 10-IE and verified electronically through digital signature certificate or electronic verification code before furnishing the income tax return as per Section 139(1).

Can we Switch Between the Old and New Tax Regime Every Year?

While the old tax regime benefits due to various deductions, the new tax regime benefits due to lower tax rates at the cost of disallowances of various deductions. However, it should be noted that the option to opt for the new taxation regime is available only once for a person having income from business or profession. Once, he exercises Section 115BAC and then opts out of the same, then he shall never be eligible to opt for the new scheme again unless he ceases to receive income from the business and profession.

However, no such restriction is imposed on persons not having income from business or profession like salaried individuals etc. Therefore, they can opt in and opt-out of the scheme multiple times. Thus, the taxpayer should now get vigilant about the tax savings that are expected from the old taxation schemes. Let us make an informed decision with eAuditors!

 


Author : Dipen

Date     : 12-Jul-2022


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