New Income Tax Regime Vs Old Tax Regime: Which is better for you? With Automated Income Tax House Rent Exemption Calculator in Excel

Union Budget 2020 offers individuals the choice of paying tax under the new regime of lower income tax rates by forgoing the tax exemptions/deductions or continue to pay tax under the existing income tax laws by claiming the applicable exemptions and deductions. Essentially, the more exemptions an individual claims, the less likely he/she is to benefit from the new optional tax regime however which regime is beneficial will vary on a case to case basis. Calculations show that salaried individual.

An individual with gross salary up to Rs 12.5 lakh claiming only deductions under section 80C (Rs 1.5 lakh), 80D (Rs 25,000) and a standard deduction of Rs 50,000 will pay more tax under the new personal income tax regime. Lower the gross salary, higher the additional tax payable by individuals in the new tax regime claiming only these three exemptions (up to the amounts mentioned) in the old tax regime. Individuals claiming little as tax breaks are more likely to gain from the new regime.

The tables below show the amount of tax saved or extra tax payable for a salaried individual at different salary levels under the existing tax regime and the new proposed tax regime.

If the salaried individual is claiming deductions under section 80C, 80D (medical premium), HRA exemption, LTA exemption and deduction of interest paid on housing loan taken for self occupied property up to permissible limits, he is is likely to be better off in the existing personal tax regime.

Case II— Salaried individual claiming most common deduction/exemptions, i.e. under sections 80C, 80D and standard deduction
Assuming the individual is claiming these tax breaks: standard deduction of Rs 50,000, deduction of Rs 1.5 lakh under section 80C and Rs 25,000 under section 80D for medical premium. In this case, if the individual opts for the new personal tax regime then at a gross salary of Rs 7.5 lakh the person will have to pay Rs 20,800 extra tax, at a gross salary.

Therefore, a high earner claiming only these deductions is likely to save tax under the new regime but lower-income earners up to a gross salary of Rs 12.5 lakh will end up paying more tax. 

Case III— Salaried individual claiming more exemptions/deduction, i.e. under sections 80C, 80D, standard deduction and HRA exemption
Assuming the individual is claiming these tax breaks: standard deduction of Rs 50,000, deduction of Rs 1.5 lakh under section 80C and Rs 25,000 under section 80D for medical premium and HRA exemption (varied as per salary income level). In this case, if the individual opts for the new personal tax regime then at gross salary of Rs 7.5 lakh

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5-Step Guide to Help Choose Between Old Vs New Tax Regime as per New system of Income Tax by the Budget 2020

While under the old tax regime the salaried individuals can continue paying taxes, as they had been doing till now; under the new regime, they will be liable to pay lower taxes, provided they forego their deductions and exemptions.

 Budget 2020 has given taxpayers an option to continue with the existing tax regime or opt for the new proposed tax regime. Employees today are conflicted as to which regime they should really opt for and why? While under the old tax regime the salaried individuals can continue paying taxes, as they had been doing till now; under the new regime, they will be liable to pay lower taxes, provided they forego their deductions and exemptions.

Difference between the two tax regimes

 Deductions/Exemptions

Main exemptions that taxpayers will have to forego if they opt for the new regime are Standard Deduction of Rs. 50,000 to salaried taxpayers, House Rent Allowance for individuals staying in rented accommodation, Interest on housing loan for a self-occupied property, Leave Travel Allowance twice in a block of four years, the most commonly claimed deduction under section 80C for provident fund contribution, life insurance premium, school tuition fee for children, ELSS, PPFetc.

None of the above can be claimed under the new tax regime. A total of 70 exemptions have been done away within the new tax regime.

Steps to opt for your preferred Tax Regime:

Step 1: Understand what suits you best

If your taxable income is below 5 lakhs or above 15 lakhs, then tax rates are the same in both; hence the older regime that allows exemptions is more suited

Step 2: Check the exemptions

Out of all the exemptions that have been removed, check how many are applicable for you and how much money you can save by opting for those. This will help you in the next step.

Step 3: Do the Math

Based on your net taxable income post exemptions/deductions, calculate total income tax under old as well as the new regime.

Step 4: Go beyond the numbers

Apart from taxable income, your lifestyle, life stage, short- and long-term priorities along with financial goals are excellent parameters to decide what type of tax regime you should opt for. With inflation, rising consumerism and growing needs, it’s important to start saving early and spend smart. The power of compounding has a great role to play in achieving your financial goals.

Step 5: Remember to plan well

It’s important to note that it is possible to change tax regimes every financial year, as both will exist simultaneously. First – time taxpayers may decide to choose the new tax regime as it’s simple to follow and translates to lower tax liability. However, in the long run, investments have financial benefits and taxpayers will want to go for the old regime as that will be more beneficial.

The current budget announcement has gone the extra mile to provide ample freedom of choice to each salaried individual. It’s best to understand every variable as you go along this checklist before making the switch. Freedom is yours, use it wisely.

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