As the New Financial Year i.e. FY 2020-21 is going to begin, every salaried Individual is worried about the Tax Planning & the Investment Options available to him to reduce the Tax Burden. After Union Budget 2020 there are various changes in the Income Tax on Salary under Section 115BAC. This article covers detailed analysis and comparison for Income Tax on Salary-Old Vs New Regime. We have analysed all aspects of Taxation on salary in old and new regime including deductions & exemptions provided in the recent budget.
In Budget 2020, the Income Tax Department has introduced a distinctive concept of new tax regime by way of inserting Section-115BAC. Accordingly from FY 2020-21(AY 2021-22) onwards the individual and HUF not having any income under the head PGBP shall have an option to choose between the new and the old tax regime. Both regimes have separate tax slabs and rates along with separate deductions/exemptions and have different benefits. Both the options are mutually exclusive and taxpayer can opt for any one tax regime best suitable for him/ her.
The key difference between the old tax regime and new tax regime is that the taxpayer cannot claim majority of the deductions/ exemption given in the Income Tax Act, 1961 if one opts for taxation of his Income under New introduced Tax Regime. The taxpayer shall be required to comply with the provision of Section-115BAC to be eligible for the new tax regime.
ASPECTS OF OLD REGIME AND NEW REGIME FOR AY 2021-22
Eligible assessee – An individual and HUF.
Note: All the other forms of entities (i.e. AOP, BOI, Trust, partnership firms, LLPs, etc.) are neither eligible to claim the beneficial provisions of Section 115BAA or Section 115BAB of the Act (concessional tax regime for companies) nor the provisions of Section 115BAC of the Act. Thus, such entities have no option, but to follow the old regime of taxation.
Income Slab | New Tax Rate | Existing Tax Rate |
|---|---|---|
Up to ₹ 2,50,000 | Exempt | Exempt |
₹ 2,50,000 – ₹ 5,00,000 | 5% | 5% |
₹ 5,00,000 – ₹ 7,50,000 | 10% | 20%, |
₹ 7,50,000 – ₹ 10,00,000 | 15% | 20% |
₹ 10,00,000 – ₹ 12,50,000 | 20% | 30% |
₹ 12,50,000 – ₹ 15,00,000 | 25% | 30% |
Above ₹ 15,00,000 | 30% | 30% |
Income Tax on salary: Rate Old Regime Vs. New Regime
NOTE: Assessee having Total Income Below INR 5,00,000 shall be ELIGIBLE FOR BENEFIT of REBATE u/s 87A upto an amount of INR 12,500. Therefore there will be no Tax Outflow in case of an Assessee having Income Less than INR 5,00,000.
DEDUCTIONS/EXEMPTIONS NOT ELIGIBLE TO BE CLAIMED UNDER NEW TAX REGIME
Exemption for Leave Travel Allowance under section 10(5)
Exemption for House Rent Allowance under section 10(13A).
Exemption from any other Allowance under section 10(14).
Exemption from allowance to MPs or MLAs under section 10(17).
Exemption of 1,500 in case of clubbing of minor child income under section 10(32).
Standard Deduction of ₹ 50,000 [Section 16(ia)].
Entertainment Allowance of ₹ 5,000 [Section 16((ii)].
Professional Tax [Section 16(iii)].
Interest u/s 24 in respect of the self-occupied or vacant property.
Additional depreciation [Section 32(1)(iia)]
Section 32AD
Section 33AB
Section 33ABA
Deduction for donation made to approved scientific research association, university college or other institutes for doing scientific research which may or may not be related to business [Section 35(1)(ii)];
Section 35(1)(iia)
Deduction for donation made to university, college, or other institution for doing research in social science or statistical research [Section 35(1)(iii)];
Section 35(2AA)
Section 35AD
Section 35CCC
Deduction from family pension income, equal to 33 1/3 per cent of such income or Rs. 15,000, whichever is less under section 57(IIA).
Any deduction under chapter VI-A (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc).
NOTE: Deduction: under sub-section (2) of section 80CCD (employer contribution on account of employee in notified pension scheme) and section 80JJAA (for new employment) CAN BE CLAIMED under New Tax Regime as well.
Summary of various other Exemptions/ Deduction allowed or disallowed under New & Old Regime for Income tax on salary:
Sr. No. | Exemption/ Deduction | New Tax Regime u/s 115BAC | Old Tax Regime |
|---|---|---|---|
01 | Leave Salary u/s 10(10AA) | Allowed | Allowed |
02 | Gratuity | Allowed | Allowed |
03 | Commutation of Pension u/s 10(10A) | Allowed | Allowed |
04 | VRS Compensation u/s 10(10C) | Allowed | Allowed |
05 | House Rent Allowance u/s 10(13A) and Rule 2A | Not Allowed | Allowed |
06 | Standard Deduction (if claimed Transport Allowance & Medical Reimbursement shall had be forgone). | Not Allowed | Allowed up to ₹ 50,000 |
07 | Entertainment Allowance u/s 16(ii) | Not Allowed | Allowed |
08 | Professional Tax | Not Allowed | Allowed |
09 | Leave Travel Concession U/s 10(5) | Not Allowed | Allowed |
10 | Tour and Transfer Allowance | Allowed | Allowed |
11 | Conveyance Allowance (paid to an employee to meet the actual cost of travelling during the course of employment) | Allowed | Allowed |
12 | Daily Allowance (as explained above in point-4) | Allowed | Allowed |
13 | Helper Allowance | Not Allowed | Allowed |
14 | Any allowance granted to academic, research and training | Not Allowed | Allowed |
15 | Study Allowance | Not Allowed | Allowed |
16 | City Compensatory Allowance | Not Allowed | Allowed |
17 | Children Education Allowance | Not Allowed | Allowed ₹ 100 p.m. per child up to 2 children |
18 | Hostel Allowance | Not Allowed | Allowed |
19 | Travel Allowance to a specially abled employee | Allowed ₹ 3,200 p.m. | Allowed ₹ 3,200 p.m. |
20 | Travel Allowance to other than divyang employees (if standard deduction was not claimed) | Not Allowed | Allowed |
21 | Free food and beverage through vouchers (Non-transferable) provided to the employee- | Not Allowed | Allowed up to ₹ 50 per meal |
22 | Interest u/s 24B on housing loan (in repect of property mentioned u/s 23(2) | Not Allowed | Allowed |
Deductions/Exemptions in Old Regime Vs. New Regime
Please Note that the carried forward losses or unabsorbed additional depreciation, if any, shall not be eligible to be set-off by the assessee. The losses not set-off shall also not be allowed to be carried forward to future years.
Similar to the provisions of Section 115BAA / Section 115BAB of Act, the amount of unabsorbed additional depreciation not allowed to be set-off shall be added to the opening WDV of the block of asset as on 1 April 2020.
COMPARISON OF TAX UNDER OLD REGIME VS NEW REGIME
Annual Taxable Income | Tax as per old regime (deduction u/s 80C & 80D and standard deduction considered*) | Tax as per new regime (no exemption & no deduction)
| ||
Tax Payable | Net Salary in-hand | Tax Payable | Net Salary in-hand | |
2,50,000 | Nil | 2,50,000 | Nil | 2,50,000 |
5,00,000 | Nil | 5,00,000 | Nil | 5,00,000 |
6,50,000 | – | 4,50,000 | 28,600 | 6,21,400 |
7,50,000 | – | 5,50,000 | 39,000 | 7,11,000 |
8,00,000 | 23,400 | 5,76,600 | 46,800 | 7,53,200 |
10,00,000 | 65,000 | 7,35,000 | 78,000 | 9,22,000 |
12,50,000 | 1,17,000 | 9,33,000 | 1,30,000 | 11,20,000 |
15,00,000 | 1,95,000 | 11,05,000 | 1,95,000 | 13,05,000 |
17,50,000 | 2,73,000 | 12,77,000 | 2,73,000 | 14,77,000 |
20,00,000 | 3,51,000 | 14,49,000 | 3,51,000 | 16,49,000 |
25,00,000 | 5,07,000 | 17,93,000 | 5,07,000 | 19,93,000 |
Tax Liability Old Regime Vs. New Regime
*Total deduction claimed is ₹ 1,50,000 (u/s 80C) + ₹ 50,000 (u/s 80D) + ₹ 50,000 (Standard Deduction) =₹2,50,000
**Also its worth considering that the above table shows that Old Tax regime is beneficial it’s up to the taxpayer as well that he needs to invest for claiming deduction u/s 80C & 80D amounting to ₹2,00,000. Before making such amount of investment one needs to analysis his/ her cash liquidity status to avoid any cash crunch.
KEY POINTS TO BE NOTED:
If individual or the HUF has no business income option shall be exercised for every previous year. So for taxpayer who does not have any income from PGBP they have an option available with them every Financial Year to opt between both the tax regimes.
The selection should be made at the time of filing the tax return in case the individual or HUF has no business income.However, most salaried individuals will need to make this decision much sooner, and convey such decision to their employer who will be required to deduct TDS, in order to avoid cash flow issues.
Set off loss of the following shall not be allowed in case person opts for taxation under New Tax Regime:
Carried forward of loses and deprecation of previous years only which had been attributed due to any of the deductions mentioned in above clause.
Loss from house property from any other head of income (including PGBP).
Further, NO DEDUCTION SHALL BE AVAILABLE FOR donation u/s 80G under New Tax Regime.
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COMPARISON OF TAX LIABILITY IN OLD REGIME VS NEW REGIME
Mr. Mohit has the following salary structure, Lets calculate Income tax on salary-
| Particulars | Amount (Rs.) |
| Basic | 6,30,000 |
| HRA | 3,15,000 |
| Special allowance | 2,55,000 |
| Total Salary | 12,00,000 |
| Professional tax | 2,400 |
Mr. Mohit also invested in tax saving mutual fund (ELSS) amounting to INR 1,50,000 and pay medical insurance premium amounting to INR 25,000. Interest income from saving bank account amounting to INR 10,000. House Rent Allowance give to employee amounting to INR 3,50,000. Rent paid by employee amounting to INR 4,00,000.
Calculate taxable income and tax.
Now Mr. Mohit has to check his tax liability under both the tax regimes and opt for the best in his tax planning:
Particulars | As per Old Tax Regime | As per New Tax Regime |
SALARY | ||
Total Salary | 12,00,000 | 12,00,000 |
Less: | ||
HRA | 3,15,000* | Not Allowed |
Professional tax | 2,400 | Not Allowed |
Standard Deduction | 50,000 | Not Allowed |
Net Taxable Salary | 8,32,600 | 12,00,000 |
INCOME FROM OTHER SOURCES | ||
Interest on saving Bank Account | 10,000 | 10,000 |
Gross Income | 8,42,600 | 12,10,000 |
Less: Deductions | ||
Investment in saving funds | 1,50,000 | Not Allowed |
80D: Medical Premium | 25,000 | Not Allowed |
80TTA: Interest Income | 10,000 | Not Allowed |
Total Deduction | 1,85,000 | NIL |
Net Taxable Income | 6,57,600 | 12,10,000 |
Tax Amount: | 44,020 | 1,17,000 |
Add: Cess @ 4% | 1761 | 4,680 |
Total Tax Liability | 45,780 | 1,21,680 |
Calculation of HRA Exemption:
The minimum figure out of these three is the HRA that you can claim for tax deductions:
The actual rent paid minus 10% of your basic salary | 3,37,000 |
The actual amount of HRA given | 3,50,000 |
50% of your basic salary (for a metropolitan city) | 3,15,000 |
Amount of HRA allowed for deduction | 3,15,000 |
Note: The taxpayer is required to pay an annual rental pay out amounting to Rs. 4,00,000 to claim to above HRA deduction.
We can see from illustration how in old tax regime Mr. Mohit will get the benefit of tax.
Hence, salaried individual have to choose the tax slab rate keeping by in mind all his investments, deductions on investments, other deductions and exemptions. Further one has to analysis his liquidity as well while selecting the appropriate Tax regime. The person has to plan well in advance about its future.
DEDUCTIONS AVAILABLE WITH THE PAYER OPTING FOR OLD TAX REGIME
1. Deduction u/s 80C :
As per Section 80CCE maximum amount of deduction cumulatively u/s 80C, 80CCC & 80CCD(1) is limited to Rs 1,50,000/-.
Resident and Non Resident both can claim the deduction u/s 80C.
Following investments/payments are eligible for deduction u/s 80C:
Life insurance premium {Premium paid for self, spouse & children (minor/major) is available as deduction subject to a maximum limit of 10%/15%/20% of sum assured, as the case may be}.
NSC {in the name of self, spouse & minor children}. NSC in the name of major children, parents, brother, sister, any other relative cannot be claimed as deduction u/s 80C.
PPF {in the name of self, spouse & children (minor/major)}. PPF in the name of parents, brother, sister, any other relative cannot be claimed as deduction u/s 80C.
Fixed Deposit of 5 years or more with Banks/Post Office {in own name only} – Lock-in period of 5 years.
Principal repayment of housing loan taken from banks, notified financial institutions or specified employer for purchase/construction of a residential house to be used for residential purposes – Lock-in period of 5 years from the end of the year in which the house is purchased/constructed.
Tuition fees of any two children paid to any educational institution in India for full-time education (excluding donation/development fees).
Employee’s contribution to recognized provident fund/ statutory provident fund
Contribution to Equity Linked Savings Scheme such as Unit Linked Insurance Plan (ULIP).
2. Deduction u/s 80CCD [Contribution to New Pension Scheme (NPS) of Central Government
{Atal Pension Yojana has been notified u/s 80CCD}] :
Individual’s Own Contribution {80CCD(1) & 80CCD(1B)}:
i. 80CCD(1): Individual’s contribution to NPS eligible for deduction (Salaried – Max 10% of Salary; Self Employed – Max 20% of GTI)
ii. 80CCD(1B): Additional deduction of maximum Rs 50,000 available u/s 80CCD(1B) if deduction not fully available u/s 80CCD(1) due to the following reasons:
a. Contribution to NPS exceeds 10% of Salary/20% of GTI; or
b. Contribution to NPS exceeds Rs 1,50,000; or
c. Total investments eligible for deduction u/s 80C, 80CCC & 80CCD(1) exceeds Rs 1,50,000.
Employer’s Contribution {80CCD(2)}:
I. Employer’s contribution to be first added to the gross salary of the employee.
ii. ThereaGer, such contribution is allowed as deduction to the employee u/s 80CCD(2). Deduction u/s 80CCD(2) should not exceed 14% of Salary (if the employer is Central Government) and 10% of Salary (in case of any other employer).
Note: Salary for the purposes of Section 80CCD would mean retirement benefit salary.
3. Deduction u/s 80D [Medical Insurance Premium, Contribution to CGHS, Preventive Health Check-up] :
Individual can claim the deduction u/s 80D whether he is a resident or non-resident.
Quantum of Deduction :
i. Block 1 (Self, Spouse & Dependent Children): Maximum Rs 25,000 (Rs 50,000 for senior citizens)
ii. Block 2 (Parents – Dependent/Independent): Maximum Rs 25,000 (Rs 50,000 for senior citizens)
iii. Note: Maximum deduction of Rs 5,000 is admissible in respect of preventive health check per assessee.
Additional Points :
i. Medical insurance premium and contribution to CGHS should have been paid by any mode other than cash which includes net-baking, A/c Payee Cheque etc.
ii. Preventive health check-up can be paid by any mode including cash.
iii. Where no medical insurance policy has been taken for resident senior citizens, deduction available for actual medical expenses instead of medical insurance premium and maximum deduction can be claimed amounting to Rs. 50,000.
4. Deduction u/s 80GGA [Donations to Institutions Notified u/s 35, 35AC & 35CCA] :
Any person not having PGBP income can claim the deduction u/s 80GGA whether he is a resident or non-resident.
No maximum limit on the amount of deduction.
Donations exceeding Rs 2,000 should have been made by any mode other than cash.
5. Deduction u/s 80TTA [Interest on Savings Deposit With Banks & Post Offices] :
Individuals other than senior citizens and HUF can claim this deduction whether he is a resident or non resident.
Savings account interest received is allowed as deduction, subject to a maximum limit of Rs 10,000 p.a.
6. Deduction u/s 80TTB [Interest from Banks & Post Offices in case of Senior Citizens] :
Resident individual who is a senior citizen can claim the deduction u/s 80TTB.
Interest received from banks & post offices on savings deposits as well as time deposits is allowed as deduction, subject to a maximum limit of Rs 50,000 p.a.
7. Deductions under Section 16 (For Income Tax On Salary):
Standard Deduction under Section 16(ia) | Entertainment Allowance– Section 16(ii) | Professional Tax– Section 16(iii) |
Least of the following available as deduction to all employees:
| Least of the following available as deduction to only government employees:
| Paid by person carrying on business/profession: Professional tax to be debited to P&L A/c on actual payment basis.
From gross salary professional tax is allowed as a deduction on an actual payment basis.
|
NOTE: The above mentioned deduction are allowed only in case where employee opts for old tax regime.
I Hope this article on “Income Tax on Salary-Old Vs New Regime” would prove fruitful to the Assessee.
Also Read:
Income Tax slab for AY 2020-21/ FY 2019-20
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