The government has introduced new tax brackets in this budget. The new tax rates are lower compared to the older tax rates. However, if a taxpayer wants to opt for the new tax regime, then he/she needs to forgo most deductions and exemptions.
Read on to know more about the new tax regime.
In Budget 2020, Nirmala Sitharaman, the finance minister, introduced new tax brackets. Under the new tax regime, the income tax slab is lower. However, to opt for the new tax rates, the taxpayer must forgo most of the deductions and exemptions. But if a person wants to claim deductions and exemptions, then he/she can opt for the old tax regime.
The finance minister has allowed individuals to choose between both the tax regime. Hence, individuals can select a regime that helps them lower their tax liability.
New Tax Regime vs Old Tax Regime
|Annual Income||New Tax Regime||Old Tax Regime|
|Up to Rs. 2.5 Lakhs||0||0|
|Between Rs. 2.5 Lakhs and Rs. 5 Lakhs||5%||5%|
|Between Rs. 5 Lakhs and Rs. 7.5 Lakhs||10%||20%|
|Between Rs. 7.5 Lakhs and Rs. 10 Lakhs||15%||20%|
|Between Rs. 10 Lakhs and Rs. 12.5 Lakhs||20%||30%|
|Between Rs. 12.5 Lakhs and Rs. 15 Lakhs||25%||30%|
|Above Rs. 15 Lakhs||30%||30%|
Exemptions and Deductions Not Allowed in the New Tax Regime
There are various exemptions and deductions that can’t be availed under the new tax regime, such as-
- In case a person opts for the new tax regime, he/she can’t avail the leave travel allowance exemption.
- House rent allowance will not be allowed if a person chooses the new tax regime.
- The taxpayer can’t avail the standard deduction of Rs. 50,000.
- Deductions under Section 80C, such as life insurance premium aren’t allowed in the new tax regime.
- Deductions under Section 80D, such as the premium paid for purchasing a medical insurance policy can’t be availed.
Exemptions and Deductions Allowed in the New Tax Regime
Here are a few exemptions and deductions that are allowed in the new tax regime-
- Employer’s contribution towards the employee’s EPF will be exempted from tax. Furthermore, the interest received from EPF is exempted in the new tax regime.
- Leave encashment received by the employee when he/she retires will be exempted from tax.
New Tax Regime or Old Tax Regime- Which is Better?
In order to select between the regimes, a taxpayer needs to calculate tax as per both the tax slabs. While the new tax regime offers low tax rates, it doesn’t allow most exemptions and deductions. However, in case the taxpayer selects the old tax regime, he/she will have to pay tax at higher rates. But he/she can avail the exemptions and deductions.
Thus, a person who wants to claim the deductions and exemptions in order to lower his/her tax liability should consider opting for the old tax regime. However, the new tax regime can be beneficial for a person who wants to pay tax at lower rates.
Keep the aforementioned points in mind while choosing between both the tax regimes.