FOR EXISTING POLICY
FOR NEW POLICY
The Finance Act, 2020 has introduced a new tax scheme, with different income tax rates for various income slabs vis-à-vis the existing scheme. The taxpayer can choose from between the old and new tax schemes.
To be able to determine which income tax slab is better – old or new, it is important to have a fair understanding of both tax schemes. Knowing what the current tax slab is shall help in answering if the new tax slab beneficial.
This article aims to help you decide which income tax option is more suitable to you.
What are Income Tax Slabs?
Taxes are chargeable at different rates according to the Income of the taxpayer. The rates vary with the income brackets. The law defines these brackets and the corresponding tax rate. Such groupings are known as the income tax slabs.
What are the Income Tax Rates Under the two Schemes?
The details of the two tax schemes for Financial Year 2020-21 is tabulated below.
| Annual Income (₹) | Tax Rate* - Existing | Tax Rate -New Scheme |
|---|---|---|
| 0 - 2,50,000 | 0% | 0% |
| 2,50,000 - 5,00,000 | 5% | 5% |
| 5,00,000 - 7,50,000 | 20% | 10% |
| 7,50,000 - 10,00,000 | 20% | 15% |
| 10,00,000 - 12,50,000 | 30% | 20% |
| 12,50,000 - 15,00,000 | 30% | 25% |
| Above 15,00,000 | 30% | 30% |
The income tax slabs, and rates vary in case of senior citizens (individuals aged 60 years or more) and super senior citizens (individuals aged 80 years or more).
As observed above the tax rates are equal or lower under the new tax scheme. However, there are a few clauses specific to both these schemes. It is important to take into consideration these clauses while choosing the income tax scheme.
What is the Difference Between the Old and New Income Tax Schemes?
Certain financial instruments are available for claiming tax deductions- under the relevant sections of the Income Tax Act (e.g. life insurance policies under Section 80C). This encourages savings and insurance while reducing your tax liability. Besides, Section 10 of the Act exempts certain incomes to reduce tax liabilities. The new tax scheme has bought in some changes here. Under the old tax scheme, there were 120 permissible exemptions, whereas the new tax scheme has removed 70 exemptions and has retained the remaining 50.
Some of the popular known exemptions and deductions removed under the new tax scheme include:
- Leave travel allowance.
- House rent allowance.
- Standard deduction of ₹50,000 for salaried employees.
- Deductions for interest from savings account deposits under section 80TTA/TTB.
- Some of the tax-saving instruments under Chapter VI-A, which include subsections of Section 80, like the popular Section 80C. These include commonly known investments like insurance premium, Public Provident Fund (PPF), National Pension Scheme (NPS), and ELSS (Equity Linked Savings Scheme) amongst others.
- Relief on interest paid on home loan under Section 24.
Similarly, below is the list of some of the commonly known exemptions that continue to exist under the new tax scheme.
- Life insurance income.
- Agricultural income.
- Standard deduction on rent.
- Leave encashment on retirement.
- Receipts up to ₹5 Lakh under the Voluntary Retirement Scheme (VRS).
- Death cum retirement benefits.
What to choose - Old Tax Scheme vs New Tax Scheme
Ravi had a Gross Total Income of ₹6,50,000. This income falls in the income bracket of ₹5,00,000 - ₹7,50,000. Prima facie, the new tax scheme is beneficial as the tax rate is 10% as against the old tax rate of 20%. However, the total tax liabilities may vary in different scenarios.
Scenario 1 - Ravi has invested in eligible tax-saving instruments for availing the benefit of ₹1.5 Lakh under Section 80C.
| Particulars | Old Tax Scheme (₹) | New Tax Scheme (₹) |
|---|---|---|
| Gross Total Income | 6,50,000 | 6,50,000 |
| Deductions Under Section 80C | 1,50,000 | - |
| Taxable Income | 5,00,000 | 6,50,000 |
| Tax Amount | Tax to be paid as per applicable rates | |
| Up to ₹2,50,000 | - | - |
| ₹2,50,000 - ₹5,00,000 | 12,500 | 12,500 |
| Above ₹5,00,000 | - | 15,000 |
| Total Tax Amount | 12,500 | 27,500 |
Scenario 2 - Ravi hasn’t made any investments in financial instruments mentioned under Section 80C.
| Particulars | Old Tax Scheme (₹) | New Tax Scheme (₹) |
|---|---|---|
| Gross Total Income | 6,50,000 | 6,50,000 |
| Deductions Under Section 80C | - | - |
| Taxable Income | 6,50,000 | 6,50,000 |
| Tax Amount | Tax to be paid as per applicable rates | |
| Up to ₹2,50,000 | - | - |
| ₹2,50,000 - ₹5,00,000 | 12,500 | 12,500 |
| Above ₹5,00,000 | 30,000 | 15,000 |
| Total Tax Amount | 42,500 | 27,500 |
Hence, as seen above the old tax scheme is beneficial in scenario 1, whereas the new tax scheme is advantageous under scenario 2.
Thus, it is important to take into account both the exemptions as well as deductions for comparing the tax liabilities under both the schemes.
The LTC Cash Voucher Scheme: As a taxpayer, it is imperative to be aware of all the latest guidelines and changes in the tax schemes. The Leave Travel Concession (LTC) for government employees and the Leave Travel Allowance (LTA) for private-sector employees is a popular facet of the salary structure in India. Due to the COVID-19 lockdown, most people couldn’t travel in 2020 and hence couldn’t avail the LTC/LTA. To enable the salaried to avail their LTC benefits, the government introduced the LTC cash voucher scheme for government employees on 20th October 2020 and private employees on 29th October 2020. Under the scheme, the employees need to spend three times their applicable LTC amount on consumer goods with GST more than 12%. On verification of invoices, the employees will receive a tax-exempt cash payout that is equal to the applicable LTC.
Conclusion
As illustrated above, all the relevant deductions and exemptions must be considered while opting for a tax scheme. Savings and investment plans offered by life insurers that offer the dual benefit of life insurance, as well as long-term savings, are the perfect instrument for first-time investors as they also offer the additional benefit of tax saving.
TATA AIA Life Insurance is a well-established name in the insurance industry with a range of savings and investment plans in its product suite. You may schedule a meeting with our advisor to make an informed investment decision to suit your investment preference.
To Summarise
There is no one answer to which income tax option is better. It is subjective and varies from case to case. The selection gets largely influenced by the quantum of deductions and exemptions. Hence it is important to consider the allowable deductions and exemptions. Besides, claiming deductions is not the sole objective of investing in tax-saving instruments. Investments support in fulfilling financial objectives like retirement planning, children’s education and marriage. Hence timely investments are beneficial in creating a financially secured life.
To say, it is crucial to consider the importance of investments before determining the tax liabilities under both schemes.
