Much awaited tax system has already been announced by the finance minister Nirmala Sitharaman on Feb1, in the budget 2020. The curiosity among the taxpayers of the country was build up as this year tax system claimed to be the improved version of the old tax system. The objective of the new tax regime is to remove the complications of the current tax system with numerous exemptions and deductions and to eradicate the dependency on the financial consultants that arise from the complexity.

What is a new tax slab?

In the new income tax regime, 6 slabs have been introduced at a reduced rate from the old tax regime.

Old Income tax rates

(With Exemptions)

Annual IncomeNew Income tax rates

(Without Exemptions)

NilUp to Rs 2.5 lakhsNil
5%Rs 2.5 lakhs to Rs 5 lakhs5%
20%Rs 5 lakhs to Rs 7.5 lakhs10%
Rs 7.5 lakhs to 10 lakhs15%
30%Rs. 10 lakhs to Rs 12.5 lakhs20%
Rs 12.5 lakhs to Rs. 15 lakhs25%
Rs 15 lakhs & above30%

From the above list, it can be seen that when the annual income of an individual range from Rs 5 lakhs to Rs 10 lakhs, the income tax rate under the old tax regime is 20%. In contrast, the income tax rate under the new tax regime is 10% for annual income ranging from Rs 5 lakhs to Rs 7.5 lakhs and 15% for the annual income ranging from Rs 7.5 lakhs to Rs 10 lakhs. Hence the effective rate is less in the new tax regime if the deductions and exemptions are not availed in the old tax regime.

What is the benefit of a new tax regime?

  • Simplification of the complex existing tax structure that contains a plethora of exemptions resulting in many mistakes during the tax filing. 
  • Those who do not want to claim exemptions and indulge in documentation can benefit from paying a lower rate of tax without the waiver.
  • It is an optional scheme that gives freedom to the individuals to change every year that suits their financial plans. However, the similar flexibility is not provided on the corporate tax.
  • As the 70 exemptions have been excluded in the new tax system, hence the income tax frauds are reduced.

What are the drawbacks of the new tax regime?

  • It is not a good option for people with high investments, as it does not contain any exemptions, even the people that come under lower tax slab does not get any benefit of the exemption and will end up paying more tax
  • It will lead to the reduction of  household saving of those households that have a lesser saving mind-set
  • It will impact the demand for the house property as the individual who has invested in house property gets a significant exemption on the interest paid on the housing loan
  • The insurance sector will also suffer as for majority insurance is considered as a tax-saving instrument than the protection cover –  result in more marketing efforts to attract the consumers

What are the deductions that are applicable and not applicable in the new tax regime?

Deductions ApplicableDeductions not applicable
  • Employer contribution to the  employee pension scheme under subsection 2 of section 80CCD
  • Section 80 JJAA new employment
  • Standard deduction on rent – 30% of the rent paid
  • Agricultural income – no limit
  • Income from life insurance –  if the insurance cover is 10 times the annualised premium
  • Retrenchment compensation of Rs 5 lakhs
  • VRS proceeds of Rs 5 lakhs
  • Leave encashment on the retirement of Rs 3 lakhs (no limits for government workers
  • Clause 13A – House Rent allowance
  • Clause 5 – Leave travel allowance
  • Clause 14 – Special allowance under Rule 2BB (Children education allowance, hostel allowance, transport allowance, uniform allowance, etc.)
  • Clause 17 – Allowances to MPs/MLAs
  • Clause 32 – Allowance for adding minor income
  • Section 10AA – Exemption for SEZ
  • Section 16 – Standard deduction, entertainment & employment tax deduction
  • Section 24 –  Interest paid on house loan
  • Section 32(1)(iia) – additional depreciation
  • Deductions under sections 32AD, 33AB and 33ABA
  • Various deductions for 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
  • Deduction under section 35AD or section 35CCC
  • Section 57 Clause(iia) deduction from family pension

The maximum deduction is Rs 2.5 lakhs for the annual income above 15 lakhs, and as the income lowers the deductions also lower result in paying more tax, hence, the new tax regime does not live up to the expectation of the reduced salaried person

Which Tax system is better?

It can be well explained through an example, let us take two cases with exemption & without exemption, where the annual income is Rs 7, 50,000

Option 1 – Without Exemption

Annual Income of Rs. 7,50,000
Old Tax SystemNew Tax System
Income Tax SlabTax rateTax

(Amount)

Tax rateTax

(Amount)

Up to Rs 2,50,0000000
Rs 2,50,001 –  Rs 5,00,000512,500512,500
Rs 5,00,000 – Rs 7,50,0002050,0001025,000
Gross Tax amount6250037500
Adding Health & Education cess4250041500
Net Tax Payable6500039000

Option 2 – With Exemption

Annual Income of Rs. 7,50,000
Old Taxable IncomeNew Taxable Income
(Rs)(Rs) 
Annual Income7,50,0007,50,000
Exemptions u/s 80C(1,50,000)
u/s 80CCD(1B)(50,000)
u/s 80D(50,000)
HRA(10,000)
Taxable Income4,90,0007,50,000
Annual Income of Rs. 7,50,000
Old Tax SystemNew Tax System
Income Tax SlabTax rateTax

(Amount)

Tax rateTax

(Amount)

Up to Rs 2,50,0000000
Rs 2,50,001 –  Rs 5,00,000512,500512,500
Rs 5,00,000 – Rs 7,50,000001025,000
(-) Rebate(12,500)
Gross Tax amount037500
Adding Health & Education cess4041500
Net Tax Payable039000

From the above example, we can see that the individual has to pay more tax than the Old tax regime where after the tax deductions, the tax payable comes to Zero.

The new tax system is created so that the individual focuses more on spending than focussing on his/her financial security. Individuals who choose the new tax slab have to forgo tax exemptions which will make them spend more.

Mainly in India, the investments are majorly made in order to save tax, and if these exemptions are removed then investment in the instruments such as Housing, Mutual funds and Insurance will lose its popularity among the individuals affecting the demands.

However, for few, the new tax system can be beneficial for those who have been making investment mistakes by parking their money in wrong financial instruments and also for those who want to save themselves with the complex paperwork associated with these financial instruments.

It is to be noted that if the individual chooses any of the regimes and is unsatisfied with the tax, then he/she has an opportunity to shift to the other tax regime in the next financial year. The individual should consider all the factors and do proper financial planning while choosing an old or new tax regime.