Income Tax Return for the FY 2020-21 (AY 2021-22) has to be filed by the individual taxpayers by choosing the optional tax regime. Finance Act-2020 has introduced a dual tax regime whereby taxpayers are given a choice to opt for new regime of concessional tax rate without any deduction & exemptions or old tax regime of higher tax rate albeit with deductions & exemptions. Taxpayers are given freedom & flexibility to make the choice for better tax optimization.
Taxpayers without any business income will have a free entry & exit option in the new regime. However, it is not so for a person having business income wherein option once exercised cannot be withdrawn except on one subsequent occasion. In such cases, the option has to be exercised not only considering the income of the FY 2020-21 but also considering the planning & impact for succeeding years.
Let us know about the difference between the old tax regime & new tax regime along with the way of making the right choice.
The difference of tax rate in the Old Regime vs New Regime is as under:
||Tax Rate under Old Tax Regime
||Tax Rate under New Tax Regime
|Up to Rs. 2.50 Lakh
|Rs. 2.50 Lakh to Rs. 5 Lakh
|Rs. 5 Lakh to Rs. 7.50 Lakh
|Rs. 7.50 Lakh to Rs. 10 Lakh
|Rs. 10 Lakh to Rs. 12.50 Lakh
|Rs. 12.50 Lakh to Rs. 15 Lakh
|Above Rs. 15 Lakh
The old regime has just 3 applicable tax rates of 5%, 20% & 30%, as against 6 slab rates of tax under the new tax regime. Income above Rs. 15 Lakh is unaffected whether it’s a new tax regime or an old tax regime.
New tax regime requires taxpayers to forgo most of the exemptions & deductions and so taxpayers are in a dilemma of making the right choice. Common question is – which tax regime is better – Old tax regime with higher tax rate offering exemption & deductions or the new concessional tax rate regime without any exemptions & deductions?
Let us first compare the tax liability without any deductions & exemptions on income at every peak point of income slab in case of individual & HUF taxpayer (who is not a senior citizen & not salaried taxpayers):
|Income of the Individual
||Tax in Old Regime*
||Tax in New Regime*
|Rs. 2.50 Lakh
|Rs. 5 Lakh
|Rs. 7.50 Lakh
|Rs. 10 Lakh
|Rs. 12.50 Lakh
|Rs. 15 Lakh
|Rs. 20 Lakh
(In New Income Tax regime, Tax slab rates are the same for all individuals including senior citizens and Very Senior citizens).
Tax calculated above is inclusive of 4% cess.
Ignoring tax rebate u/s 87A.
Apparently, though the new regime displays net savings in tax but it may not be positive for all taxpayers after considering exemptions and deductions. To arrive at the correct conclusions, taxpayers need to work out the break-even point of deductions and exemptions where the tax liability under the old regime and the new regime will be the same. It can be arrived at by summing up all deductions and exemptions which the taxpayer intends to use. So long as the amount of deduction & exemption exceeds the break-even point, staying in the old regime would be advisable. Few of the common deduction which majority of the taxpayers avails are
- Deductions u/s 80C up to Rs. 1.50 Lakh towards LIC/PPF/Housing Loan Principal repayment, etc
- Deductions u/s 80CCD(1B) up to Rs. 50,000 towards National Pension Scheme.
- Deduction up to Rs. 30,000/- towards mediclaim & preventive health check up (Parents mediclaim deduction is not claimed by many & hence ignored).
- Rs. 50,000/- of standard deductions by salaried taxpayers
- HRA / LTC deductions by salaried taxpayers
- Rs. 10,000/- saving bank account interest u/s 80TTA (Rs. 50,000/- by senior citizens u/s 80TTB)
- Housing Loan interest up to maximum of Rs. 2 Lakh by taxpayers who have availed housing loan.
It may be noted that all above deduction will not be available if the taxpayers opts for new tax regime.
Though the new tax regime is simple to follow, yet it will be worthwhile to do the mathematics before opting for it. The million dollar question is, how should taxpayers make this choice? Both regimes have their own sets of pros and cons. The choice would necessarily dependant on:
- Income slab of every individual.
- Extent of exemptions and deduction available with the taxpayers.
- Alternate investments options & returns thereon if taxpayers prefer not to opt for the new regime.
- Short term and long term financial goals of the taxpayers.
With above background, following observation can further help taxpayer in arriving at a better conclusion:
- Many senior citizens may not be taking any tax breaks available under section 80C, 80D or Housing loan interest. In such cases, it would always be advisable to opt for the new tax regime as it would entail lower tax burden on them.
- For taxpayers who have higher family or personal commitment and find it difficult to save & invest money adequately, a new tax regime would be a boon for them. Similar will be the case of individuals who don’t have commensurate exemptions/ deductions.
- Taxpayers with income up to Rs. 7.50 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of just Rs. 2 Lakh may find it relevant to stay in the old tax regime.
- Taxpayers with income in the range of Rs. 7.50 Lakh to Rs. 10 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of more than Rs. 2.50 Lakh may find it relevant to stay in the old tax regime.
- Taxpayers with income in the range of Rs. 10 Lakh to Rs. 12.50 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of more than Rs. 2.25 Lakh may find it relevant to stay in the old tax regime.
- Taxpayers with income in the range of Rs. 12.50 Lakh to Rs. 15 Lakh with deduction u/s 80C, 80CCD(1B), Housing Loan interest outgo, etc of more than Rs. 3 Lakh may find it relevant to stay in the old tax regime.
Making the Choice of Better Tax Regime:
One needs to calculate the total income tax under the old as well as new regime individually. So long as the benefit of exemptions and deduction is more than the impact of higher tax rates under the old tax regime, it would be advisable not to opt for the new tax regime but continue with the old tax regime. It makes sense to evaluate before taking a final call. To be more specific, if any taxpayer has an admissible deduction & exemptions of more than Rs. 3 Lakh then it will generally be advisable for such taxpayers to remain in the old tax regime irrespective of their income slab.
Section 115BAC which provides for the new tax regime options reads as under:
Tax on income of individuals and Hindu undivided family.
115BAC. (1) Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, the income-tax payable in respect of the total income of a person, being an individual or a Hindu undivided family, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2021, shall, at the option of such person, be computed at the rate of tax given in the following Table, if the conditions contained in sub-section (2) are satisfied, namely:—
||Rate of tax
||Upto Rs. 2,50,000
||From Rs. 2,50,001 to Rs. 5,00,000
||5 per cent
||From Rs. 5,00,001 to Rs. 7,50,000
||10 per cent
||From Rs. 7,50,001 to Rs. 10,00,000
||15 per cent
||From Rs. 10,00,001 to Rs. 12,50,000
||20 per cent
||From Rs. 12,50,001 to Rs. 15,00,000
||25 per cent
||Above Rs. 15,00,000
||30 per cent:
Provided that where the person fails to satisfy the conditions contained in sub-section (2) in any previous year, the option shall become invalid in respect of the assessment year relevant to that previous year and other provisions of this Act shall apply, as if the option had not been exercised for the assessment year relevant to that previous year:
Provided further that where the option is exercised under clause (i) of sub-section (5), in the event of failure to satisfy the conditions contained in sub-section (2), it shall become invalid for subsequent assessment years also and other provisions of this Act shall apply for those years accordingly.
(2) For the purposes of sub-section (1), the total income of the individual or Hindu undivided family shall be computed,—
(i) without any exemption or deduction under the provisions of clause (5) or clause (13A) or prescribed under clause (14) (other than those as may be prescribed for this purpose) or clause (17) or clause (32), of section 10 or section 10AA or section 16 or clause (b) of section 24 (in respect of the property referred to in sub-section (2) of section 23) or clause (iia) of sub-section (1) of section 32 or section 32AD or section 33AB or section 33ABA or sub-clause (ii) or sub-clause (iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) of section 35 or section 35AD or section 35CCC or clause (iia) of section 57 or under any of the provisions of Chapter VI-A other than the provisions of sub-section (2) of section 80CCD or section 80JJAA;
(ii) without set off of any loss,—
(a) carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in clause (i);
(b) under the head “Income from house property” with any other head of income;
(iii) by claiming the depreciation, if any, under any provision of section 32, except clause (iia) of sub-section (1) of the said section, determined in such manner as may be prescribed; and
(iv) without any exemption or deduction for allowances or perquisite, by whatever name called, provided under any other law for the time being in force.
(3) The loss and depreciation referred to in clause (ii) of sub-section (2) shall be deemed to have been given full effect to and no further deduction for such loss or depreciation shall be allowed for any subsequent year:
Provided that where there is a depreciation allowance in respect of a block of assets which has not been given full effect to prior to the assessment year beginning on the 1st day of April, 2021, corresponding adjustment shall be made to the written down value of such block of assets as on the 1st day of April, 2020 in the prescribed manner, if the option under sub-section (5) is exercised for a previous year relevant to the assessment year beginning on the 1st day of April, 2021.
(4) In case of a person, having a Unit in the International Financial Services Centre, as referred to in sub-section (1A) of section 80LA, which has exercised option under sub-section (5), the conditions contained in sub-section (2) shall be modified to the extent that the deduction under section 80LA shall be available to such Unit subject to fulfilment of the conditions contained in the said section.
Explanation.—For the purposes of this sub-section, the term “Unit” shall have the meaning assigned to it in clause (zc) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005).
(5) Nothing contained in this section shall apply unless option is exercised in the prescribed manner by the person,—
(i) having income from business or profession, on or before the due date specified under sub-section (1) of section 139 for furnishing the returns of income for any previous year relevant to the assessment year commencing on or after the 1st day of April, 2021, and such option once exercised shall apply to subsequent assessment years;
(ii) having income other than the income referred to in clause (i), alongwith the return of income to be furnished under sub-section (1) of section 139 for a previous year relevant to the assessment year:
Provided that the option under clause (i), once exercised for any previous year can be withdrawn only once for a previous year other than the year in which it was exercised and thereafter, the person shall never be eligible to exercise option under this section, except where such person ceases to have any income from business or profession in which case, option under clause (ii) shall be available.
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