The Finance Ministry introduced its new income tax regime during the Budget 2020, in order to smoothen the process of taxpaying. The 2020 regime, known as the 'Simplified Tax regime,' offered reduced tax rates, with options to forego some deductions and exemptions during income tax calculations. Here's a close look at both regimes -- the old and the new one -- and which one is more suitable.
1. The old tax regime
If one looks at the old tax regime, the tax rates are higher when compared to the new tax regime. But the old regime offers a number of deductions or tax exemptions such as house rent allowance (HRA), leave travel allowance (LTA) tax exemptions, Section 80C, 80 D deductions, etc.
The biggest section for deduction for tax-paying individuals is Section 80C, by which one can reduce the taxable income by Rs 1.5 lakh in one go.
Besides, the old regime also offers breathers as tax deductions on your loans, like home and education, to premiums you pay for health insurance.
| Exemptions | Deductions |
| House Rent Allowance | Public Provident Fund |
| Leave Travel Allowance | ELSS (Equity Linked Saving Scheme) |
| Mobile and Internet Reimbursement | Employee Provident Fund |
| Food Coupons or Vouchers | Life Insurance Premium |
| Company Leased Car | Principal and Interest component of Home Loan |
| Standard Deduction | Children Tuition Fees |
| Uniform Allowance | Health Insurance Premiums |
| Leave Encashment | Investment in National Pension Scheme |
| Tuition fee for Children | |
| Saving Account Interest |
2. 2020 tax regime
The new income tax regime has a number of better points. Like it offers lower income tax rates to reduce the tax burden on total income. It also eliminates the requirement to maintain proof of investments/ expenses incurred by the salaried taxpayer.
Besides, the tax slabs, by which the income tax is calculated, have increased. The new regime offers lower rates in the sub-Rs. 15 lakh range.
Also, the exemptions and deductions offered under the old regime have been totally removed.
Applicable exemptions under the new system:
Old regime vs 2020 regime
Both systems have pros and cons. The one major difference is revised slab rates. The income tax individuals pay is based on a slab system in India, which is made taking into account the average income of the individuals.
So, for the income segments up to Rs 15 lakh, the new tax regime has proposed lower income-tax rates, but only if the person is ready to give up the exemptions and deductions available under various provisions of the Income Tax Act.
| Income level (slab) | Old tax rate regime* | New tax rate regime |
| Up to 2,50,000 | 0% | 0% |
| 2,50,001 to 5,00,000 | 5% | 5% |
| 5,00,001 to 7,50,000 | 20% | 10% |
| 7,50,001 to 10,00,000 | 20% | 15% |
| 10,00,001 to 12,50,000 | 30% | 20% |
| 12,50,001 to 15,00,000 | 30% | 25% |
| Above 15,00,000 | 30% | 30% |
This means individuals opting for the new regime will have let go of some exemptions including Leave Travel Allowance (LTA), House Rent Allowance (HRA), and deductions available including Insurance Premium payout and Savings Account Interest under chapter VI A of the IT Act Section 80 such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G, 80GG, 80GGA, 80GGC, etc.
Advantages
1. A note by Canara Bank and HSBC Bank states that India's gross savings rate was approximately 30 per cent in March 2019 and domestic savings was a significant contributor to the overall rate.
This was mainly because, the old income tax regime helped promote savings for any future eventuality like marriage, education, purchase of house property, medical exigency, etc. by enforcing investments in specified tax-saving instruments like ULIPs, which over a period inculcated the savings culture in individuals.
2. On the other hand, the 2020 regime offers reduced tax rates and compliances. As most of the exemptions and deductions are not available, tax filing becomes simpler as there is lesser documentation required.
3. Moreover, the reduced tax rate provides more disposable income to people who could not invest in specified instruments due to certain financial or personal reasons.
4. Therefore, the new regime offers increased liquidity in the hands of the taxpayers.
Also read: Union Budget 2023: The Finance Ministry should simplify and rationalise personal tax laws