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From FY 2020-21, you can choose to pay income tax under an optional new tax regime. The new tax regime is available for individuals and HUFs with lower tax rates and fewer deductions/exemptions. We will discuss the features of the new tax regime and how you can benefit from it.
Latest Update:
CBDT has issued a circular on 11th January 2022 extending the timelines for certain direct tax compliances for AY 2021-22.
1. ITR filing due date extension:
i) ITR filing for taxpayers covered under tax audit is extended to 15th March 2022
ii) ITR filing for transfer pricing cases is extended to 15th March 2022
2. Furnishing audit report:
i) Due date to furnish the audit report as per the Income Tax Act is extended to 15th February 2022
ii) Due date to furnish the audit report for transfer pricing cases is extended to 15th February 2022
The Budget 2020 introduces a new regime under section 115BAC giving individuals and HUF taxpayers an option to pay income tax at lower rates. The new system is applicable for income earned from 1 April 2020 (FY 2020-21), which relates to AY 2021-22.
The tax rates under the new tax regime and the existing tax regime are:
| New slab rates | Existing slab rates | ||
|---|---|---|---|
| Income from Rs 2.5 lakh to Rs 5 lakh | 5% | Income from Rs 2.5 lakh to Rs 5 lakh | 5% |
| Income from Rs 5 lakh to Rs 7.5 lakh | 10% | Income from Rs 5 lakh to Rs 10 lakh | 20% |
| Income from Rs 7.5 lakh to Rs 10 lakh | 15% | Income above Rs 10 lakh | 30% |
| Income from Rs 10 lakh to Rs 12.5 lakh | 20% | ||
| Income from Rs 12.5 lakh to Rs 15 lakh | 25% | ||
| Income above Rs 15 lakh | 30% | ||
The new tax regime does not allow 70 deductions and exemptions (discussed in para 4). The tax payable under both the new and the existing regimes without claiming deductions and exemptions is as below:
| Annual income | Tax under the existing regime (Rs) | Tax under the new regime (Rs) | Tax savings under the new regime (Rs) |
| Up to Rs 7,50,000 | 65,000 | 39,000 | 26,000 |
| Up to Rs 10,00,000 | 117,000 | 78,000 | 39,000 |
| Up to Rs 12,50,000 | 195,000 | 130,000 | 65,000 |
| Up to Rs 15,00,000 | 273,000 | 195,000 | 78,000 |
The above table shows that the new tax regime generally saves taxes for taxpayers who don’t claim any deductions or exemptions.
The following are some of the major deductions and exemptions you cannot claim under the new tax system:
You can claim tax exemption for:
A salaried taxpayer can choose the new tax regime at the beginning of FY 2020-21 and intimate their employer. The employee cannot change their choice anytime during the financial year. However, they can change their choice when filing the income tax return in July 2021.
The due date for tax filing for the FY 2020-21 (AY 2021-22) is 31st Dec 2021 (extended from 31st July 2021).
In case an employee does not choose the new tax regime at the beginning of the financial year, the employer will deduct tax (TDS) under the existing tax regime. Hence, a salaried taxpayer can opt in and opt out every year. That means you can choose the new tax regime in one year and choose the regular tax regime in another year.
A non-salaried taxpayer has to choose the new regime when filing the tax return. They need not declare or intimate their choice to anyone during the year. However, a non-salaried taxpayer (taxpayers with an income from business or profession) cannot opt-in and opt-out of the new tax regime every year. Once a non-salaried opts out of the new tax regime, they cannot opt-in again for the new tax regime in the future.
From a tax planning perspective, choosing the tax regime at the beginning of the financial year is essential. A taxpayer must compare the income tax under the new tax regime with the existing regime. Once the taxpayer chooses the tax regime at the beginning of the year, the investments and TDS or advance tax payable calculations are made accordingly. Also, the taxpayer has to furnish Form 10IE to the income tax department before filing the return if the taxpayer intends to opt for the new tax regime.
| Income (Rs) | Amount (Rs) | Old regime (Rs) | New regime (Rs) |
| Salary | 1,250,000 | 12,50,000 | 12,50,000 |
| Less: Standard deduction | 50,000 | 50,000 | – |
| Less: Professional tax | 2,400 | 2400 | – |
| Gross total income | 1,197,600 | 11,97,600 | 12,50,000 |
| Less: Deduction u/s 80C | 150,000 | 1,50,000 | – |
| Total income | 1,047,600 | 1,047,600 | |
| Income tax | 126,780 | 125,000 | |
| Add: Education cess @ 4% | 5,071 | 5,000 | |
| Total tax | 131,851 | 130,000 |
In the above example, for an income of Rs 12,50,000, the new tax regime is marginally beneficial by Rs 1,851. However, if you claim further deductions for health insurance, investment in NPS, education loans and so on, the existing regime will be helpful in respect of tax savings.
| Income (Rs) | Amount (Rs) | Old regime (Rs) | New regime (Rs) |
| Salary | 1,000,000 | 1,000,000 | 1,000,000 |
| Less: Standard deduction | 50,000 | 50,000 | Nil |
| Less: Professional tax | 2,400 | 2,400 | Nil |
| Gross total income | 947,600 | 947,600 | 1,000,000 |
| Less: Deduction u/s 80C | 150,000 | 150,000 | Nil |
| Total income | 797,600 | 797,600 | 1,000,000 |
| Income tax | 72,020 | 75,000 | |
| Add: Education cess @ 4% | 2,881 | 3,000 | |
| Total tax | 74,901 | 78,000 |
In Example 2, for an income of Rs 10 lakh, the existing tax regime is beneficial by Rs 3,099.
If an individual claims lower deductions for tax savings towards health insurance, investment in NPS and so on, the new regime will be more beneficial against individuals who utilise the tax-saving investments.
Also, individuals with an income bracket between Rs 5-10 lakh with lower deductions claims will benefit from the new regime. In contrast, individuals under a higher income tax bracket above Rs 15 lakh of income per annum can benefit more from the existing regime by making tax-saving investments.
It is important to note that each taxpayer should calculate income tax, consider their tax-saving investments and then choose the regime.
In the case of a self-occupied property, you cannot claim a deduction on interest for a housing loan under the new tax regime. The deduction of Rs 2 lakh allowed in the existing system is not available in the new tax regime. Also, you cannot set off the loss of Rs 2 lakh from house property from your salary income.
If you have let out house property, you can claim a deduction for interest paid on the housing loan. Note that the new tax regime restricts the deduction to the taxable rent received from the property against the old regime. In the new regime, you cannot set off the loss arising from the house property due to excess interest paid over the rental income. Also, you cannot carry forward the loss from house property to future years for set off.
Deductions and exemptions not allowed against business income:
In the case of a business income, an individual or HUF cannot claim set-off of the brought forward business loss or unabsorbed depreciation.
The deductions are not available under the new regime to the extent they relate to deductions/exemptions withdrawn.
Income Tax Slabs 2021 and ‘New tax regime’
Form 10IE- Option to choose New tax regime
Income Tax in India: Basics, slabs and E-filing Process 2021
Factors to be considered for choosing the new tax regime under Budget 2020
