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    Comparison of new income tax regime with old tax regime

    Synopsis

    The new income tax regime offers concessional tax rates vis-à-vis tax rates in the old tax regime. Further, as most of the exemptions and deductions are not available, the documentation required is lesser which makes the income tax return filing easier.

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    The tax benefits under the old regime is available on investments in specified instruments which comes with a specific lock-in periods.
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    By Dr. Suresh Surana

    The Union Budget 2020 introduced a new personal income tax regime for individual taxpayers. However, the option for this concessional tax regime came with a cost, it required the taxpayer to forego certain specified deductions. These include standard deduction of Rs 50,000, deduction under section 80C of Rs 1.50 lakh and interest on self-occupied property of Rs 2 lakh, deductions which are availed by most taxpayers. As a result, the concessional tax regime may not always be beneficial.

    Based on the illustrative table below, you can clearly see that the maximum benefit that can be availed under the new tax regime (considering no investments are made) is Rs 75,000 in terms of tax savings. As a result, unlike the corporate tax concessional tax rate regime which reduces tax rates across income levels, the concessional tax rate has limited application and will benefit persons in the lower income brackets. The highest personal income tax rate of 42.7 per cent will continue to be a huge challenge for high net worth individuals (HNIs). A comparative table reflecting the existing and personal tax regime rates is provided below:

    New-vs-old-tax-regimeET Online
    **No tax up to Rs. 500,000 taxable income, as Rebate under section 87A is available
    *In the existing tax regime the basic exemption income slab in case of a resident individual who is 60 years or more (senior citizen) and resident individual of the age of 80 years or more (very senior citizens) at any time during the previous year, continues to remain the same as before at Rs 3 lakh and Rs 5 lakh, respectively. The above table presents the comparative working for individual taxpayers, other than senior citizens and super senior citizens, wherein Rs 2.5 lakh is the basic exemption limit in both the tax regimes.

    A. The pros of the new regime are as follows:

    • Reduced tax rates and compliance: The new regime provides for concessional tax rates vis-à-vis tax rates in the existing or old regime. Further, as most of the exemptions and deductions are not available, the documentation required is lesser and tax filing is simpler.
    • Investor may not prefer to lock-in funds in the prescribed instruments for the specified period: Under the new regime, all taxpayers would be treated at par and benefit of deduction/allowances would not be a criteria for availing the tax exemption. This may be helpful for those categories of taxpayers who may not subscribe to the specified modes of investments, as most of the investments have a lock-in period, before which it cannot be withdrawn. They can invest in open-ended mutual funds/instruments/deposits, which provides them good returns as well as flexibility of withdrawal as well. For instance, certain eligible instruments have a longer lock-in period such as fixed deposits with banks and post offices have a lock-in period of five years, equity-linked savings schemes (ELSS) is for a period of three years, National Savings Certificates (NSC) for five years, etc.
    • Increased liquidity in the hands of the taxpayer: The reduced tax rate would provide more disposable income to the taxpayer, who could not invest in specified instruments due to certain financial or other personal reasons.
    • Flexibility of customising the investment choice: The existing tax regime provides for deductions to the taxpayer, provided he makes investments in certain instruments and manner as prescribed in the Act. This restricts the investment choices for the taxpayer as he has to make the investments only in the instruments specified. However, the new regime provides taxpayer with a flexibility of customising their investment choices.
    And following are the cons of the new regime:

    • Non-availability of certain specified tax deductions: The new tax regime does not allow the taxpayer to avail certain specified deductions. Illustrative list is as follows:
    (a) Clauses referred in section 10 as follows:
    (i) Clause (5) - Leave travel concession;
    (ii) Clause (13A) - House rent allowance;
    (iii) Clause (14) - Special allowance detailed in Rule 2BB (such as children education allowance, hostel allowance, transport allowance, per diem allowance, uniform allowance, etc.);
    (iv) Clause (17) - Allowances to MPs/MLAs;
    (v) Clause (32) - Allowance for clubbing of income of minor;
    (b) Exemption for SEZ unit under section 10AA;
    (c) Standard deduction, deduction for entertainment allowance and employment / professional tax as contained in Section 16;
    (d) Interest under section 24 in respect of self-occupied or vacant property (loss under the head IFHP for rented house shall not be allowed to be set off under any other head and would be allowed to be c/f as per extant law);
    (e) Additional depreciation under section 32(1)(iia);
    (f) Deductions under sections 32AD, 33AB and 33ABA;
    (g) Various deductions for donation or expenditure on scientific research contained in sub-clause (ii) or sub-clause (iia) or sub-clause (iii), of sub-section (1) or sub-section (2AA) of section 35;
    (h) Deduction under section 35AD or 35CCC;
    (i) Deduction from family pension under clause (iia) of section 57;
    (j) Any deduction under chapter VI-A (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.). However, deduction under sub-section (2) of section 80CCD (employer contribution on account of employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed.

    Making your choice between the two
    In light of the above and considering the new income tax regime, wherein certain deductions and exemptions would not be applicable, if taxpayers want to opt for the concessional new tax regime, they may evaluate both the regimes. A taxpayer who is looking for flexibility in investment choices and does not want to invest in the specified eligible instruments, may consider opting for the new tax regime. However, it is advisable to do a comparative evaluation and analysis under both regimes, to see what works out best for you, before opting to continue with the old one or opting for the new one.

    Note that the choice can be exercised every year and any regime which is beneficial can be adopted by the individual (except for those who have income from business or profession). Individuals who have income from business or profession cannot switch between the new and old tax regimes every year. If they opt for the new taxation regime, such individuals get only one chance in their lifetime to go back to the old regime. Further, once you switch back to existing tax regime, you will not be able opt for new tax regime unless your business income ceases to exist.

    The income tax department has brought out a tax comparison utility, which is available on their web portal and in which, an individual taxpayer can use to evaluate which option is better for him/her. The link to the same is as under: https://www.incometaxindiaefiling.gov.in/Tax_Calculator/

    The pros and cons of the old tax regime

    A. The pros of the old regime:

    • The old income tax regime by enforcing investments in specified tax-saving instruments, over the period inculcated the savings culture in individual and led to savings for any future eventuality like marriage, education, purchase of house property, medical, etc.
    • India's gross savings rate was approximately 30 per cent in March 2019 and domestic savings by individuals is a significant contributor to the overall savings rate. If more individuals will opt for the new regime, the savings rate would decrease, nevertheless the consumption cycle and demand would be revived.
    B. The cons of the old regime:

    • The tax benefits under the old regime are available on investments in specified instruments and also there is a specific lock-in prescribed for most of the instruments from three-five years. This may not be not a suitable tax-saving option for millennials, who prefer to spend than save, and senior citizens, as they would prefer having liquidity in their hands and investing in instruments which have a flexible and open-ended tenure.
    • The investor cannot opt for any other star-rated funds, which may be performing better than the specified instruments, which are mostly risk-averse in nature and may not provide significant returns over the period of investments.
    • In case of assessment proceedings before the tax authorities, documentation and proof of investments is required to be retained in the old regime, which may not be required in the new regime.

    (The author is Founder, RSM India)
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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    7 Comments on this Story

    Aslam Khan178 days ago
    modi sir's regime is going to be a curse on Indians living conditions..he is running the country like a child running a toy car..no micro planning, no macro planning, no long time planning, none of the ministers, except one or two, have any intelligence or experience to run their ministries.. some ministers like ram vilas paswan, rajnath Singh etc are waiting for opportunities to loot the country..only God can save this country..
    john tarun179 days ago
    Investment in mutual funds and shares has been a loss even for the faithful who have lost 30 to 40% of their investments. if they had invested in FD
    they would have saved enough. too late now. if it crashes another 30% they'll be DOOMED. god save the economy.hope sense prevails n lockdowns are removed to allow economy to recover. they need to wait atleast 1 to2 years so far as FDI Investment increases. elae our economy is ruined.like modi said we go back 9 years back which is like a curse due to godhra n delhi riots.
    Vilas Save181 days ago
    Has the consumption cycle started as a result of the new tax scheme ?
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