The key difference between the old regime and new regime is in tax rates and the number of exemptions available. The new regime has lower tax rates and fewer exemptions available than last financial year’s i.e old regime.
Exemptions mean the taxpayer is free from the tax burden on certain incomes. For example, you do not have to pay tax on income from agriculture.
Deduction means removing certain investments and expenditures the taxpayer makes and then calculating the gross income. For example, if you pay Rs. 20,000 as a health insurance premium, you can deduct this amount from your total income.
In the ‘old tax regime,’ there are 120 exemptions. Taxpayers do not benefit from all of them. Most of them complicate the direct tax system. After a thorough study, the Ministry of Finance has removed around 70 exemptions.
Now the question is if you opt for the new tax regime, what are the exemptions and deductions you wouldn’t be able to claim further? Here’s a list
- Leave Travel Allowance
- House rent allowance
- Standard deduction of Rs 50,000 that was available for salaried individuals
- Deductions available under Section 80TTA/TTB ( on interest from savings account deposits )
- Entertainment allowance deduction and professional tax ( For government employees)
- Tax relief on interest paid on home loan for self-occupied or vacant property u/s 24
- Deduction of Rs 15000 allowed from family pension under clause (iia) ( Section 57)
- Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) (Except, deduction under Section 80CCD(2)—employers contribution to NPS, and Section 80JJA) and so on. These popular tax saving investment options include ELSS, NPS, PPF, tax break on insurance premium among others.
One can still claim deduction under sub-section ( 2) of section 80CCD which is basically an employer’s contribution towards employee’s account in NPS and section 80JJAA ( for new employment). Also note that if the employee’s contribution to EPF and NPS exceeds more than Rs 7.5 Lakh, in the financial year in question, then the employee is liable to pay tax. Here’s a list of important exemptions that are retained in the new system
Important exemptions which are retained in the new system:
- Income from Life Insurance,
- Agricultural Income,
- Standard reduction on rent,
- Retrenchment compensation,
- Leave encashment on retirement,
- VRS proceeds up to Rs 5 lakhs,
- Death cum retirement benefit,
- Money received as a scholarship for education, etc.
Old vs New: A Comparison For Different Slabs
Taxpayers with annual income between RS.5 lakhs to Rs.10 lakhs are taxed at 20%, under the old regime. And in the new regime, they will be taxed at half that rate i.e. 10%. Also, those with an annual income of Rs.7.5 lakhs to Rs.10 lakhs will have to pay a 15% income tax.
However, if the taxpayer is benefiting from exemptions and his net tax payable is less, he/she can choose to continue with the old tax regime.
How Will I know Which Scheme Is More Beneficial For Me?
Both systems have their own sets of pros and cons. The old system has many exemptions and deductions under numerous sections – availing a few of these required people to invest in tax saving investment options, which helped inculcate a good habit of investing. On the other hand, the new system gives people more flexibility and tries to simplify the process. If you are someone who was claiming a lot of deductions under the old regime, you can probably save better sticking with the same system, as per the calculations. If you weren’t making any tax saving investments or claiming any deductions earlier too, then maybe the new system may prove beneficial.It also varies based on which slab you are in as well. However, since the system is new, it makes sense to consult a competent tax expert who can suggest the optimal tax saving route for you.
Finance Minister Nirmala Sitharaman in her budget has said that gradually the exemptions and deductions will be reviewed and reduced in number as the government wants a simple Income tax system in the country. Whether or not the new system is received well and adopted by the taxpayers in the upcoming financial year, will say a lot about the tax laws that may get implemented in the future.