What is the new tax regime? Which tax regime is more beneficial? How to choose between old and new tax systems? What benefits need to be foregone for opting new regime?

1. The Finance Act 2020 brought quite a few changes to our system of Direct Taxes. The
most noteworthy change was the introduction of the New Tax Regime under section
115BAC of Income Tax Act, 1961. On one side, this new regime comes with lower slab
rates, and on the other, it deprives the assessees of many deductions and claims.
However, this scheme is absolutely optional, and the taxpayers can choose to continue
with the old method of calculating taxes, in which they can claim all the accessible
deductions and exemptions.
So, are you confused between the old and the new tax regimes? Are you still unclear
about the new system? Are you dicy on which tax system is more beneficial for you?If all
this confusion surrounds you and you are questioning which taxation regime to pick,
please read the below article to understand these two methods of taxation.
Old Tax Regime
The old tax regime has different exemption limits for individuals below the age of 60
years, between 60 and 80 years, and above 80 years.
Furthermore, the old method allows the assessees to claim various deductions on their
tax-saving investments, interest paid on housing loans, etc., and exemptions on different
allowances. Below are the tax rates according to the old tax regime:
Old income slabs Tax rates for
persons below 60
years
Tax rates for
persons between
60 and 80 years
Tax rates for
persons above 80
years
Up to Rs. 2,50,000 Nil Nil Nil
Rs. 2,50,001 to Rs.
3,00,000
5% Nil Nil
Rs. 3,00,001 to Rs.
5,00,000
5% 5% Nil

2. Rs. 5,00,001 to Rs.
10,00,000
20% 20% 20%
Above Rs.
10,00,000
30% 30% 30%
New Tax Regime
The Income Tax rates are the same across all age groups as per the new tax regime. The
income slabs are smaller, and there are seven slabs in the new tax system. The Income
Tax rates as per the new tax regime are specified in the table below:
New income slabs Tax rates applicable
Up to Rs. 2,50,000 Nil
Rs. 2,50,001 to Rs. 5,00,000 5%
Rs. 5,00,001 to Rs. 7,50,000 10%
Rs. 7,50,001 to Rs. 10,00,000 15%
Rs. 10,00,001 to Rs. 12,50,000 20%
Rs. 12,50,001 to Rs. 15,00,000 25%
Above Rs. 15,00,000 30%
So, it can be seen in the above table that the new tax regime steadily increases the tax
rates from one income slab to another.
Deductions & exemptions to be forgone while opting for the new tax regime
The government has considered that the Act provides various exemptions and
deductions, which make compliance by the assessee and administration of the tax laws
by the tax authorities a cumbersome process.
Hence, the new tax regime requires a number of deductions and exemptions to be
forgone. Thus, it is imperative to evaluate the impact of deductions/exemptions that
need to be given up to benefit from lower tax rates. Some of the common tax
exemptions/deductions which are not allowed to be claimed under the new regime
include:
• Leave travel allowance (LTA)
• House rent allowance (HRA)
• Children education allowance
• Standard deduction on salary
• Deduction for professional tax
• Interest paid on housing loan in case of self-occupied property
• Deduction for investments or expenses under Chapter VI-A like:
o deduction u/s 80C towards contribution to Public Provident Fund,
payment of children’s tuition fees, life insurance premium, principal on
housing loan, etc.
o other deductions towards medical insurance premium, medical
expenditure, interest on education loan, donations, etc.

3. Opting for the new tax regime
An individual or HUF taxpayer (resident and non-resident) may opt for the new tax
regime based on the respective applicable deductions/exemptions and sources of
income. Switching between the old and new tax regimes can be done either yearly or
only once. The frequency of opting for the new tax regime depends on the source of
income during the financial year. The same has been discussed below:
➢ Where income includes income from business or profession:
If an individual or HUF has income from a business or profession, once the option to
avail new tax regime for a financial year has been exercised, then the new rates shall
apply for subsequent years as well. However, the Act provides such assessees one single
option of switching back to the old tax regime. Once this switchback option has been
exercised, then again new tax regime cannot be opted for in a lifetime unless the
assessee ceases to have income from a business or profession.
➢ Where income does not include income from business or profession:
If an individual or HUF does not have income from a business or profession, then the
selection can be made on a yearly basis. For salaried individuals, the employer is
required to withhold tax before the payment of the salaries. Hence, the employee is
needed to inform the employer regarding his preferred tax regime.
An employee may select between old and new tax rates and intimate his employer at the
beginning of the financial year or at the time of joining new employment during the
year. However, when filing the Income Tax return, the employee can change the tax
regime initially selected.
For instance, at the beginning of the financial year, an employee chooses the new tax
regime, and his employer deducts tax from his salary based on slab rates under the new
regime. However, during the year, he makes certain tax-saving investments such as
contribution to PPF, Sukanya Samriddhi Scheme, etc., and at the time of filing his
Income Tax return, he realises that the old tax system is more beneficial to him. In such
a scenario, he can opt for the old tax regime while filing his return of income though the
employer had deducted taxes based on the new regime.
Continuing with the Old Tax Regime
The old tax regime has been in place for quite some time now, and the assessees are
perhaps more accustomed to it. However, the answer to whether or not they should
select this old method depends mainly on the slab in which their income falls and the
tax-saving investments they have in their portfolio.
Since this regime allows them deductions involving tax-saving investments, it’s suitable
to opt for this option if their portfolio includes a considerable amount of the same. By
doing so, they can claim the benefit of deduction up to Rs. 1.5 lakhs permitted under
section 80C and drastically reduce their Income Tax liability.Taxpayers can avail of a
further deduction of Rs.50,000 for investments made in NPS u/s 80CCD(1B). The old
system offers the assessees other advantages also, such as HRA exemption, LTA

4. exemption and deductions like the deduction for home loan interest up to Rs. 2 lakhs
and deduction for donations, to name a few. Hence, the assessees can opt for this tax
regime if they are eligible of claiming such deductions and exemptions offered in the old
Income Tax regime.
Opting for the New Income Tax Regime
The assessees could be charged a lower tax rate as per the new tax regime, subject to
their income level. For example, if a taxpayer’s total taxable income is Rs. 6,75,000, he
would fall in the 20% tax slab as per the old method. Whereas, as per the new tax rates,
the maximum rate chargeable on his income would be only 10%.The new tax regime
gradually increases the tax rate from one income slab to another. This shows that the
new regime is better suited for lower-income groups, freshers who wish to avoid
paperwork and pensioners.
Moreover, since the new tax system does not allow any deductions from taxable income,
a person having less tax-saving investments may get more benefits from the new tax
rates. Those having a small home loan amount can also consider the lower tax system.
Individuals and HUF can adopt new tax rates if their tax liability is low in the new tax
regime compared to the old tax regime.
Crucial points to keep in mind before opting for any one regime
Before selecting between the old and new regimes, it would be fruitful to follow the
following steps:
• Recognise the deductions and exemptions available and applicable to you.
• Calculate your total taxable income before and after taking deductions into
consideration and determine the tax liabilities as per the old and the new
regimes and decide accordingly.
• Furthermore, consider your long-term goals and strategise your investments
suitably. It’s not wise to avoid investing in tax-saving options just for opting for
the new tax scheme.
Summing Up
Both the regimes have their own sets of pros and cons. The old system offers many
exemptions and deductions under numerous sections – availing a few of these require
people to invest in tax-saving investment options, helping inculcate a good habit of
investing. On the other hand, the new regime gives people more flexibility and tries to
simplify the process.
Whether the new scheme works for an assessee or the old one will depend on the
income composition and deductions available, and one will have to decide based on his
circumstances. The alternatives must be evaluated prudently, and online tax calculators
can be used to determine the tax liability under each method before selecting between
the two taxation methods.
Source: https://www.manishanilgupta.com/blog-details/new-tax-regime-vs-old-
tax-regime