scorecardresearchIncome tax filing: Which tax regime is favourable to salaried individuals?

Income tax filing: Which tax regime is favourable to salaried individuals?

Updated: 14 Jul 2022, 07:49 AM IST

Under the old tax regime, salaried individuals are meant to pay tax at higher rate with option of seeking exemptions. On the other hand, tax rate is lower in the new tax regime 

Tax payers have two tax regimes to choose from w.e.f. April 2020

Tax payers have two tax regimes to choose from w.e.f. April 2020

With effect from April 1, 2020, salaried taxpayers have been given an option to file income tax return under either of the two tax regimes: old and new.

If you want to pay income tax at a lower rate, you can choose to pay income tax according to new regime. For example, if your taxable income falls between 7.5 lakh to 10 lakh, then the rate of tax is only 15 percent. On the other hand, the rate of tax will be 20 percent according to the old regime.

But it is vital to note that under the new regime, tax payers are not permitted to claim nearly 70 deductions and tax exemptions which were given under the old regime under sections 80C, 80D,80TTB etc.

“Choosing the regime is not straightforward because it depends on the total amount of tax liability as well as the sum of deductions one is entitled to claim. And regardless of which regime you choose, tax rebate of up to 12,500 is available to an individual taxpayer under section 87A of the Income-tax Act for those tax payers whose total income is less than 5 lakh,” said Deepak Aggarwal, a Delhi-based chartered accountant and financial advisor.

This are the tax slabs under old and new tax regime.

Income (Rs)                     Old (%) New (%)
Up to 2.5 lakh                  
Above 2.5 lakh up to 5 lakh                                 55
Above 5 lakh up to 7.5 lakh                            2010
Above 7.5 lakh up to 10 lakh                             20 15
Above 10 lakh up to 12.5 lakh              3020
Above 12.5 lakh up to 15 lakh               3025
Above 15 lakh 3030


Scenario I. If an income tax payer has a taxable income of 10 lakh, then under old tax regime, the tax amount is 12,500 + 20 percent above 5,00,000 = 12,500 and 1,00,000 = 1,12,500.

Under the new regime, the tax amount will be 37,500 + 15 percent of 2,50,000 = 37,500 + 37,500 = 75,000. The difference between the two tax liabilities is 37,500 in favour of new regime.

Note: We have ignored the surcharge on tax for the simplification of calculation.

Scenario II. Although the new tax regime looks better with lower tax liability, but after availing deductions such as section 80C, 80D, 80TTB and HRA, the tax liability will be lower.

Let us suppose in the above-mentioned case, the tax payer is entitled to exemptions amounting to 30,000, thus reducing the tax liability to 1,12,500 – 30,000 = 82,500.

As we can see even after this, his tax liability is still more than 75,000, i.e., the tax lability under new regime.

Scenario III. In this case, if the tax payer has made tax-free investments under section 80C amounting to 80,000 then his tax liability will fall proportionately. From 1,12,500, his liability will reduce by 80,000 to 32,500. This amount is obviously lower than the liability calculated under the new tax regime i.e., 75,000.

So, we can see that the new regime is favourable for those who have made lower investments offering tax incentives.

On the other hand, for those tax payers who have made investments more than the difference between the two regimes of tax, the old regime can turn out to be more favourable.

First Published: 14 Jul 2022, 07:49 AM IST