As we have entered the new financial year FY 2020-21 in India, there is one common question on every taxpayer’s minds: What Rule do we opt for while paying taxes this year? Old or New?
This question has been troubling a bunch of us ever since India's honorable Finance Minister announced in the 2020-2021 budget that the new tax scheme and that the taxpayers will be able to choose from the older scheme (FY 2019-2020) and the new one.
Just like every other workplace, even we had an exhaustive discussion over this when the payroll for the new Financial Year was to be processed. And I am happy to share some insights from the discussion with all of you.
Old vs new tax slabs
Here we will only be looking at tax slabs for individuals under the age of 60.
Now, for the last year, i.e., FY 2019-20, the tax slabs looked something like this:
| Income Tax Slab (₹) | Tax Payable |
| 0 - 2,50,000 | 0 |
| 2,50,001 - 5,00,000 | 5% |
| 5,00,001 - 10,00,000 | 20% |
| Above 10,00,000 | 30% |
Additional points to note:
- As per the interim budget presented for FY 2019-20, individuals whose yearly income, or post deduction taxable amount doesn’t exceed ₹5 lakhs, can claim a rebate of ₹12,500 under 87A. This means that they don’t have to pay any income tax since the maximum tax at ₹5 lakhs is ₹12,500. Any individual whose salary exceeds this amount, cannot claim that rebate.
- Standard deductions of ₹50,000 and maximum exemptions of ₹1,50,000 under section 80C of the Income Tax Act and other deductions like 80D (Health Insurance), and HRA are applicable.
- An additional cess of 4% for health & education applicable to the tax amount will be calculated.
These tax slabs have essentially been the same for many years except for alterations in tax rates or exemptions.
In a bid to make the tax code simpler this year:
- The tax slabs were rewritten significantly
- Major exemptions will be removed for a lower tax rate.
The new tax scheme for FY 2020-21 looks like this:
| Income Tax Slab (₹) | Tax Payable |
| 0 - 2,50,000 | 0 |
| 2,50,001 - 5,00,000 | 5% |
| 5,00,001 - 7,50,000 | 10% |
| 7,50,001 - 10,00,000 | 15% |
| 10,00,001 - 12,50,000 | 20% |
| 12,50,001 - 15,00,000 | 25% |
| Above 15,00,001 | 30% |
Any deductions except for those under sections 80CCD(2) and 80JJA have been revoked. You will also not be able to claim exemption of taxes against HRA, Housing loans, or any other conveyances and expenses. Additional 4% cess applicable over the final tax amount.
Now that we have a full picture of the two tax schemes, let’s pit them against each other:
| Old Tax Scheme | New Tax Scheme |
| 4 tax slabs | 7 tax slabs |
| Option to lower payable tax by availing deductions | Extremely limited scope. All major deductions removed |
Calculating the taxes under each plan
Now that we have compared both the schemes, let’s also see how this translates for taxpayers.
Let’s say Raj has an income of ₹8,25,000 and is confused between the two plans. He has invested in Mutual Funds amounting to ₹1,10,000 for the whole year. He even pays ₹4,000 for a Mediclaim policy along with ₹5,000 for a life insurance policy in a year. He lives in a rented apartment in Mumbai and pays ₹30,000 a month as the rent. Let us also assume that the HRA component in his current salary slip is ₹20,000.
So the income and expense breakdown for the whole year is as follows:
| Income (₹) | Expense (₹) |
| 8,25,000 (Salary) | 1,10,000 (Mutual Funds) |
| 4,000 (Medical Insurance) | |
| 5,000 (Life Insurance) | |
| 3,60,000 (Rent, with HRA at 2,40,000 per annum) |
We’ll calculate the tax Raj has to pay under both old and new tax schemes.
| Particulars | Old Regime (₹) | New Regime (₹) |
| Gross Salary | 8,25,000 | 8,25,000 |
| Standard Deduction | 50,000 | 0 |
| Income under salary | 7,75,000 | 8,25,000 |
| Deduction u/s 80C (Mutual Funds+Insurance) | 1,15,000 | 0 |
| Deduction u/s 80D (Medical Insurance) | 4000 | 0 |
| Total Taxable Income | 4,15,000 | 8,25,000 |
| Taxes Applicable | 0 | 50,700 |
The result?
Using the deductions under the older scheme, you can bring down your tax liability to 0 whereas as if you follow the new tax code, you will be liable to pay ₹50,700 as taxes.
Which tax scheme should you choose?
If we go as per the above scenario, we can say that people claiming deductions as per the older rules should stick to it. If there are taxpayers who don’t have any significant deductible investments and are happy to trade off the deductions for lower rates, they should go for the new scheme. For people starting out their professional lives, assuming most of them haven’t made any deductible contributions, the new tax scheme definitely looks more attractive.
Is your organization looking to ease your Payroll processes? Want to give an option to your employees about the tax schemes but stuck thinking how? Sign up for a free ERPNext trial today!
