Tax Saving Season – Old and New Tax Rates for Salaried Tax-payers

In the last quarter of the financial year, the employers ask employees to submit their investment declarations. This is for deducting the correct amount of income tax (TDS) from the salary income of employees. Deducting the correct amount of TDS is in the interest of an employee and employer. If lesser TDS is deducted, then the employer may face penalty and interest for short-deduction and in case a larger amount of TDS is deducted then the employee may lose on cash flow till her refund is released by the Government. The employer must obtain an employee must submit the following details about incomes and tax-saving deductions to an employer.

In this year (the financial year 2020-21), besides providing this declaration, employees are required to state whether they wish to opt for new tax rates regime or stick only to the old tax rates regime. This scheme was launched in Budget 2020 but is applicable for the returns to be filed for the current financial year (next assessment year). Hence, it is important to know the cost and benefits of each of such options before making a choice.

Alternate tax rates regime is brought for individuals and HUFs. As per this scheme, you can opt for lower tax rates on your total taxable income but along-with conditions that you may have to forego certain exemptions/deductions and tax reliefs.

What are the tax rates in the new and old regime?
The slabs of taxable income are different in each of these tax rate regimes. In the new tax rates regime, there are 6 slabs in place of 3 slabs in the old tax regime. The surcharge and cess application remain the same for both cases.

Taxable Income (₹) New Tax Rate (%) Old Tax Rate (%) Tax Savings (₹)
< 2,50,000 0 0
2,50,001 to 5,00,000 5 5 0
5,00,001 to 7,50,000 10 20 25,000
7,50,001 to 10,00,000 15 20 12,500
10,00,001 to 12,50,000 20 30 25,000
12,50,001 to 15,00,000 25 30 12,500
15,00,000 and above 30 30 0

Thus, on the basis of rates application, apparently, you can save more tax if you opt for a new tax rates regime. However, if you are opting for new tax rates, you have to forego certain tax exemptions/deductions and reliefs.

What are the exemptions/deductions not available in the New Tax Rates Regime?
Once you opt for new tax rates then you cannot claim many of the deductions and exemptions which normally would have lowered your taxable income. The popular deductions amongst these are as below:

  • House Rent Allowance
  • Leave Travel Allowance
  • All other allowances except conveyance allowance, daily allowance, and traveling allowance which are exempt to the extent of spending for official purpose
  • Standard deduction against salary income – ₹ 50,000/-
  • Profession tax and entertainment allowance
  • Interest on the self-occupied property – ₹ 200,000/-
  • Set off of loss from house property – in case of let out and vacant house property
  • 80C deductions like Life insurance premium, tuition fees, PPF, eligible Mutual funds (ELSS), term deposits such as FD’s, etc.
  • 80D, 80DD, and 80DDB deductions like medical insurance, health expenditure, etc.
  • 80G deduction on donations
  • 80E – Education loan interest paid
  • 80TTA deduction – interest on the savings bank account
  • Exempt portion of perquisites and allowances etc.
  • Family Pension

How to arrive at a choice decision?
You should choose a scheme in which you are paying lesser tax. For this, you must carry out an exercise of computation of tax liability under both the schemes factoring in all the available deductions and exemptions in your calculation. Then compare the tax amount outgo under both the regimes. The regime which is showing the last tax outgo should be chosen for this. We have worked out the tax outgo in respect of different incomes and the choice of a correct rates regime in the following table.

Deductions

 Amount

Gross income from all sources before deductions
6,00,000 7,50,000 8,00,000 9,00,000 10,00,000 11,00,000 12,50,000 13,00,000 14,00,000 15,00,000
Tax under the Old Rates with deductions and exemptions
0 33,800 65,000 75,400 96,200 1,17,000 1,48,200 1,79,400 2,10,600 2,41,800 2,73,000
50,000 23,400 54,600 65,000 85,800 1,06,600 1,32,600 1,79,400 1,95,000 2,26,200 2,57,400
1,00,000 0 44,200 54,600 75,400 96,200 1,17,000 1,63,800 1,79,400 2,10,600 2,41,800
1,25,000 0 39,000 49,400 70,200 91,000 1,11,800 1,56,000 1,71,600 2,02,800 2,34,000
1,37,500 0 36,400 46,800 67,600 88,400 1,09,200 1,52,100 1,67,700 1,98,900 2,30,100
1,62,500 0 31,200 41,600 62,400 83,200 1,04,000 1,44,300 1,59,900 1,91,100 2,22,300
1,87,500 0 26,000 36,400 57,200 78,000 98,800 1,36,500 1,52,100 1,83,300 2,14,500
2,08,333 0 21,667 32,067 52,867 73,667 94,467 1,30,000 1,45,600 1,76,800 2,08,000
2,16,667 0 19,933 30,333 51,133 71,933 92,733 1,27,400 1,43,000 1,74,200 2,05,400
2,33,333 0 16,467 26,867 47,667 68,467 89,267 1,22,200 1,37,800 1,69,000 2,00,200
2,50,000 0 0 23,400 44,200 65,000 85,800 1,17,000 1,32,600 1,63,800 1,95,000
Tax under the New Rates with No Deductions/Exemptions
No Deductions in New Scheme 23,400 39,000 46,800 62,400 78,000 98,800 1,30,000 1,43,000 1,69,000 1,95,000

(*) the red figures indicate the amount of tax-saving deductions claims at which point tax amounts under both the schemes are the same.

How to exercise this option?
The salaried taxpayers can exercise the option of choosing any of the schemes every year while filing ITR. They have to specifically mention in the ITR of AY 2021-22 (next year) about their option in the ITR form. Also, you need to inform your employer about this, since your TDS deduction is dependent on it. The option given to your employer can be changed by you at the time of filing ITR.