The budget of 2020, announced on 1 February 2020, for the first time has given taxpayers an option to choose how much tax they would want to pay. That means a taxpayer can choose to invest and pay tax on reduced income or not invest and pay a lower tax on the actual income earned. Thus, the onus of choice is on the taxpayer.
Please note: These changes are applicable for the financial year 2020-2021. Here financial year means, the period between 1 April 2020, to 31 March 2021. Here are a few pointers that will help you make your one-time choice.
As per the new optional income tax regime, the revised tax rates for the new income slabs are:
Income slabs | Tax rate |
Upto INR 2,50,000 | Nil |
INR 2,50,000 - INR 5,00,000 | 5% |
INR 5,00,000 - INR 7.50,000 | 10% |
INR 7,50,000 - INR 10,00,000 | 15% |
INR 10,00,000 - INR 12,50,000 | 20% |
INR 12,50,000 - INR 15,00,000 | 25% |
INR 15,00,000 and above | 30% |
A taxpayer can opt to pay tax at these slashed rates if they are ready to forgo deductions like:
However, deduction under sub-section (2) of section 80CCD (employer contribution on account of the employee in notified pension scheme) and section 80JJAA (for new employment) can still be claimed. Furthermore, the following allowances are still available under the new tax regime:
That means, if a taxpayer earns income less than or equal to INR 5,00,000, it doesn’t matter which tax regime is chosen. As per the old and new tax rates, the tax payable will be ‘0’.
Keeping human behaviour of resistance for change in mind, the Finance Minister has given an option to every taxpayer to opt for getting taxed at the old tax rates. The tax rates applicable for a taxpayer less than 60 years of age are::
Income slabs | Tax rate |
Upto INR 2,50,000 | Nil |
INR 2,50,000 - INR 5,00,000 | 5% |
INR 5,00,000 - INR 10.00,000 | 20% |
INR 10,00,000 and above | 30% |
However, though these optional tax rates are higher than those proposed in Budget 2020, the taxpayer can claim various deductions and get exemptions here. Most common being the HRA, standard deduction, Chapter VI A deductions, tax-free perquisites and more. That means, a regular salaried employee not receiving HRA can reduce his/her total taxable income by INR 3,11,400 as follows:
Deduction | The maximum amount available as a deduction |
Standard deduction | INR 50,000 |
Tax-free perquisite - Food and beverage | INR 26,400* |
Section 80C | INR 1,50,000 |
Section 80D | INR 25,000 |
Section 80GG | INR 60,000 |
*Tax-free perquisite - Food and beverage: Assuming a 22 day month, and 2 meals a day.
Based on the above pointers here are few comparisons to understand the effect of the tax regime better.
As mentioned earlier, if your income is INR 5,00,000 or less, your choice of the tax regime doesn’t matter. However, for any income more than INR 5,00,000, the new tax regime is suitable. Despite the available standard deduction, the reduced tax rates in the new regime are more beneficial. Please note: If you opt for the new regime now and your income crosses INR 5 lakhs in the future, you will not be able to switch to the old tax regime as of now. In other words, you will lose the advantage of the old regime perpetually.
Contrary to the above, just by claiming HRA and the standard deduction, the old tax regime helps you save more tax. *Here HRA is calculated at 40% of the half of basic pay. Basic pay is taken as 50% of the gross salary.
In this case, the old tax regime is suitable. However, if you are earning anything more than INR 15,40,000 deductions of just INR 1,50,000 won’t help. That means if your taxable salary income is more than INR 15,40,000, the new tax regime is suitable for you.
Maximum Gross salary (Based on tax slabs) | *Minimum investment/deduction needed (Standard deduction+PT is separate) |
INR 5,00,000 | <No difference> |
INR 7,50,000 | INR 50,000 |
INR 10,00,000 | INR 90,000 |
INR 12,50,000 | INR 1,15,000 |
INR 15,00,000 | INR 1,40,000 |
INR 20,00,000 | INR 3,00,000 |
*Please note: The figures and calculations above are not to be considered as advice. They are illustrative.
The analysis here is simple. Our experts say, if you are a salaried individual and have a minimum of the above-mentioned deductions/investments to claim, the old tax regime is a better choice for you. Moreover, you can also discuss with your employer/HR to structure your salary with tax-free perquisites to help you save more on taxes. Usually, at the beginning of the financial year itself, one would know the basic deductions he/she can claim, tax-free perquisites available and then, plan his/her investments wisely. Investing for a secured future has never been a bad idea! Furthermore, opting in for the new tax regime can be done anytime before filing the income tax return.
Please Note: Once you opt-in for the new tax regime, you cannot switch back to the old regime as of now.
😄Hello. Welcome to Masters India! I'm here to answer any questions you might have about Masters India Products & APIs. What brings you to our website today?
Looking for
GST Software
E-Way Bill Software
E-Invoice Software
BOE TO Excel Conversion
Accounts Payable Software
Invoice OCR Software/APIs
GST API
GST Verification API
E-Way Bill API
E-Invoicing API
KSA E-Invoice APIs
Vehicle tracking
Vendor Verification API
Other Requirement