The GOI has announced a new tax regime in the annual Budget, leaving the option to each tax payer to continue with the old regime if it suits her/him. Recently there has been some communication from ministries/departments to their respective employees to intimate their choice of option for the current FY. The salaried employees also have the option to switch between the old and new tax regimes every year.
Philosophy behind New Tax Regime
To be able to take a considered decision, it is important for every tax payer to evaluate his tax liability under both regimes. Then only can the Taxpayer opt for the one which gives more benefit. The two important factors which will influence the benefit are the income levels and the exemption levels. It may also be important to understand that the underlying theme/reason given by Govt for the new tax regime is, firstly to give more money through tax benefit to those with lower incomes who find it difficult to avail of all possible tax exemptions, and secondly, it is part of the broader plan to gradually do away with most of the exemptions.
Controllable and Non Controllable Factors
For better evaluation, we can further sub categorise both the factors, ie income levels and exemptions, under two sub categories viz controllable & non controllable.
(a) Controllable. This applies to those elements/heads where you can exercise discretion. For eg in the corporate sector, one can structure the salary in a manner which is more tax efficient. One can take more part of it as tax exempt allowances. Many exemptions are based on discretionary expenses or savings. For eg subscription to Provident funds, ELSS etc (80C), interest on FDs under Senior Citizen Scheme (80TTB), and on Interest on savings bank account (80 TTA). Life/health Insurance purchases and housing/education loans. One can also choose to receive income from equity instruments as either Dividend, or Capital Gains. Every individual can exercise discretion under these heads to decide the extent to which he wants to subscribe, and the manner in which he/she can avail of tax benefits up to permissible limits.
(b) Non-controllable. The overall salary levels may not be in control of the individual. Further you can do the structuring (where permissible) only within some guidelines and ranges. There are many perks of service/job which any rational thinker would not want to give away, viz Field allowances for armed forces, Leave travel concessions, House Rent allowance, Outfit allowance, Children education allowance, Transport allowance etc. There are many allowances which are unique to each service/job which the recipient knows best.
Overview of the New Tax Regime
The aim of this discussion is not to explain, or give a brief on the New tax Regime, but to highlight the factors and details involved in appropriate decision making. The highlights of the new tax regime are as under: –
(a) About Seventy different tax exemptions have been removed including most of the popular provisions like standard deduction of Rs 50k, Rs 1.5 lakh under 80C, Rs 10 k under 80 TTA, and deduction on interest towards home loan etc. However, most retirement instruments/benefits related exemptions continue under the new tax regime.
(b) The tax slabs have been revised from existing 4, to 7 as under:-
| Income level (₹ in Lakhs) | Old Regime | New Regime |
| 0–2.5 | Exempt | Exempt |
| 2.5–5 | 5% | 5% |
| 5–7.5 | 20% | 10% |
| 7.5–10 | 20% | 15% |
| 10–12.5 | 30% | 20% |
| 12.5–15 | 30% | 25% |
| Above 15 | 30% | 30% |
Tax Liability Under Old and New Tax Regime
As discussed earlier, there exists a wide range of combinations of income and exemption levels, thereby leading to different tax liability for each individual. To simplify the decision making, we can look at the tax liabilities under both regimes at the income levels where slabs are changing. The assumption in these calculations is that there is no exemption claim, except the standard deduction of Rs 50,000/- under the older tax regime.
| Salary Income (₹) | Rates (Old) | Rates (New) | Taxable Income (Old) | Taxable Income (New) | Tax (Old) | Tax (New) | Difference (Old-New) |
|---|---|---|---|---|---|---|---|
| 250000 | 0 | 0 | 200000 | 250000 | 0 | 0 | 0 |
| 500000 | 5% | 5% | 450000 | 500000 | 10000 | 12500 | -2500 |
| 750000 | 20% | 10% | 700000 | 750000 | 52500 | 37500 | 15000 |
| 1000000 | 20% | 15% | 950000 | 1000000 | 102500 | 75000 | 27500 |
| 1250000 | 30% | 20% | 1200000 | 1250000 | 172500 | 125000 | 47500 |
| 1500000 | 30% | 25% | 1450000 | 1500000 | 247500 | 187500 | 60000 |
| 2000000 | 30% | 30% | 1950000 | 2000000 | 397500 | 337500 | 60000 |
Break Even Levels of Income
At the looks, it might appear that the new regime is beneficial (assuming no deductions). But as discussed earlier, a rational person would always look at ways to save tax, and therefore claim all possible exemptions. The range of exemptions is very large, and therefore we can get an idea by looking at those levels of exemptions at various income levels which will yield same benefit under both regimes.
| Income (₹) | Break Even Deduction | Tax (Old) | Tax (New) | Difference |
| 650000 | 25000 | 27500 | 27500 | 0 |
| 700000 | 50000 | 32500 | 32500 | 0 |
| 750000 | 75000 | 37500 | 37500 | 0 |
| 800000 | 87500 | 45000 | 45000 | 0 |
| 850000 | 100000 | 52500 | 52500 | 0 |
| 900000 | 112500 | 60000 | 60000 | 0 |
| 950000 | 125000 | 67500 | 67500 | 0 |
| 1000000 | 137500 | 75000 | 75000 | 0 |
| 1050000 | 137500 | 85000 | 85000 | 0 |
| 1100000 | 137500 | 95000 | 95000 | 0 |
| 1150000 | 137500 | 105000 | 105000 | 0 |
| 1200000 | 141666 | 115000 | 115000 | 0 |
| 1250000 | 158333 | 125000 | 125000 | 0 |
| 1300000 | 166666 | 137500 | 137500 | 0 |
| 1350000 | 175000 | 150000 | 150000 | 0 |
| 1400000 | 183333 | 162500 | 162500 | 0 |
| 1450000 | 191666 | 175000 | 175000 | 0 |
| 1500000 | 200000 | 187500 | 187500 | 0 |
What this table indicates is that for a given Income level, if you claim exemptions above the break- even level, then you will be better off with the older tax regime. Some of the most common and universal exemptions claimed by almost all are: –
| Standard Deduction | ₹ 50,000/- |
| Sec 80 C | ₹ 1,50,000/- |
| Sec 80 D (NPS) | ₹ 50,000/- |
| Sec 80 TTA (Savings Account interest) | ₹ 10,000/- |
| Miscellaneous tax-exempt allowances (at least) | ₹ 15,000/- |
Range of Income & Exemption Combinations
This minimum exemption of Rs 2.75 lakhs would make the older regime beneficial to almost all. However, there may still be people with a unique set of income and exemptions. The benefits at higher level of exemptions factoring HRA, Home loan interest, LTC etc would be much higher and one might be interested in tax benefits at these higher levels of deductions. Those interested in looking at a much wider range of income and exemption combinations, can look at the complete table here.
Recommendation
As a matter of caution, do not declare the option of New Tax Regime unless for some reasons substantiated by correct calculations, you are very clear that it will be beneficial to you.