From the financial year 2020-21, taxpayers have the option to choose one of the two income tax arrangements.
One is the existing or old system of income tax and the other is low-income income tax system. Selecting the old tax regime will help taxpayers to take advantage of the deductions available under section 80C, section 80D etc. They can also avail tax exemption such as house rent allowance, LTC cash voucher scheme, etc. It is true that the new system of income tax has lower rates than the old system. But, in this you will have to lose most of the deduction by hand.
Tax rate and slab under new system of income tax for FY 2020-21
| Income Tax Slab (Rs) | Income tax rate (%) |
| Up to 2,50,000 | Zero |
| 2,50,001 to 5,00,000 | 5 |
| 5,00,001 to 7,50,000 | 10 |
| 7,50,001 to 10,00,000 | 15 |
| 10,00,001 to 12,50,000 | 20 |
| 12,50,001 to 15,00,000 | 25 |
| More than 15,00,000 | 30 |
As can be seen in the table, in the new system of income tax, the highest tax rate of 30 per cent starts at an income of Rs 15,00,001. At the same time, it starts at Rs 10,00,001 in the old system.
The thing to keep in mind here is that in the new system of income tax, there will be no benefit of tax exemption on deduction or rental or food coupons as an investment in Employees Provident Fund (EPF), Public Provident Fund (PPF) etc. In the new system of income tax, only one deduction is available. That is the deduction of contribution to NPS Tier-1 account on behalf of the institute under section 80 CCD (2). NPS account is available in the new system of income tax.
How to know which tax regime is good for you?
According to chartered accountants and tax experts, a person who claims more than 2.5 lakh rupees in a financial year will not benefit from going to the new tax structure.
What should be kept in mind while choosing the new income tax regime?
As per the income tax laws, the salary earners and pensioners who do not have business income can choose any tax regime, both new or old, every financial year. This means that if you have chosen a new system of income tax for the financial year 2020-21, then you can choose the old system in the next financial year i.e. 2021-22.
At the same time, if the person has a business income and has chosen a new tax regime in the financial year 2020-21, then that taxpayer will have to continue with the new tax system. Such individuals do not have the option of choosing one of the two tax regimes during every financial year.
Business income people who have adopted the new system of income tax can switch back to the old tax regime only once in their life. Once this is done, then the person will not be able to adopt the new system of income tax again.
A rebate of Rs 12,500 is available if the income of a person does not exceed Rs 5 lakh in both the arrangements of income tax. In this way, on choosing any system of income tax, if the income of the person does not exceed Rs 5 lakh, then he will not have to pay tax.
The increased basic exemption limit for Senior Citizens and Super Senior Citizens is not available in the new system of income tax. A basic exemption limit of Rs 2.5 lakh is applicable for all types of individuals in a financial year.
In a financial year, if one of the employees chooses the system of income tax, then during the year, he cannot change it. However, while filing income tax return, he will have the option to switch from one tax system to another. Then he has given any option to his company about it.
