So many individuals are thinking: Which is better for tax slab old or new (as per new Budget 2020 proposed by our Finance Minister Nirmala Sitaraman on 1st Feb 2020) for Financial Year 2020-21?
Here in this article you will get clarity on both the tax slabs with few examples.
In Budget 2020 Individuals have a choice to which tax system (old tax system or new tax system) they want to go for. Now, if you are thinking the new one tax system is better than old one, then your answer maybe correct or maybe wrong. Because, in this new tax system there is a biggest one twist, i.e. if you are going for New Tax System then there is no deduction’s & exemption available that means you have give up all the deductions and exemptions. Remember this new tax system is optional, so if you want to continue with old tax system you can, with all the deductions and exemptions.
New Tax Slab Vs. Old Tax Slab FY 2020-21 (AY 2021-22)
As discussed, above you have no deductions & exemptions under new tax system for eg. 80C, Home Loan, 80D, HRA etc.
Below are the new Tax Slab Rates for FY 2020-21
- 0 to 2.5 lakh – No Tax
- 2.5 lakh to 5 lakh – 5%
- 5 lakh to 7.5 lakh – 10%
- 7.5 lakh to 10 lakh – 15%
- 10 lakh to 12.5 lakh – 20%
- 12.5 lakh to 15 lakh – 25%
- 15 lakh & above – 30%
In addition 4% education cess on tax value will be followed as per old tax system.
And here below are the old tax slab rates
- 0 to 2.5 lakh – No Tax
- 2.5 lakh to 5 lakh – 5%
- 5 lakh to 10 lakh – 20%
- 10 lakh & above – 30%
Now, lets take a examples of some situations for Both the Tax Systems (old Vs. New)
This new tax slab is not suitable for those who are taking various types of deductions and exemptions every year. It is suitable for those who are not able managing their deductions and exemptions or not interested to invest in such cases (means they don’t want invest in PPF, ELSS Mutual Fund, NPS investment, Health Insurance, so on)
Below examples would clear your thought process and clear the way which one Tax System should be suitable for you.
Illustration 1:
If a person is earning Rs. 15 lakh per annum, he has investment towards 80C of Rs. 1.50 lakhs, Health Insurance Premium Rs. 25k, Interest on Home Loan Rs, 2 lakh.
Tax calculations under Old Tax System
So, total deduction including standard deduction of 50k – Rs 1.5 lakh + Rs 25k + Rs 2 lakh + Rs 50k (Standard deduction ) = Rs 4.75 lakh
| Income Slab From | Income Slab To | Taxable Income Difference | After Deduction | Tax Rate | Tax |
| – | 250,000.00 | 250,000.00 | – | – | – |
| 250,000.00 | 500,000.00 | 250,000.00 | – | 5% | 12,500.00 |
| 500,000.00 | 1,000,000.00 | 500,000.00 | – | 20% | 100,000.00 |
| 1,000,000.00 | 1,500,000.00 | 500,000.00 | 25,000.00 | 30% | 7,500.00 |
| Tax | 120,000.00 | ||||
| Add: 4% education cess | 4,800.00 | ||||
| Final Tax Payable | 124,800.00 |
Tax calculations under New Tax System
Remember, here you have no deductions and exemptions available.
| Income Slab From | Income Slab To | Taxable Difference | After Deduction | Tax Rate | Tax |
| – | 250,000.00 | 250,000.00 | – | – | – |
| 250,000.00 | 500,000.00 | 250,000.00 | – | 5% | 12,500.00 |
| 500,000.00 | 750,000.00 | 250,000.00 | – | 10% | 25,000.00 |
| 750,000.00 | 1,000,000.00 | 250,000.00 | – | 15% | 37,500.00 |
| 1,000,000.00 | 1,250,000.00 | 250,000.00 | – | 20% | 50,000.00 |
| 1,250,000.00 | 1,500,000.00 | 250,000.00 | – | 25% | 62,500.00 |
| Tax | 187,500.00 | ||||
| Add: 4% education cess | 7,500.00 | ||||
| Final Tax Payable | 195,000.00 |
In the above case, the Old Tax System is better than New Tax System. Total saving in tax liability with Old Tax System is Rs.70,200, which is a investible.
Illustration 2:
If a person earned Rs. 15 lakh in FY 2020-21, what is the tax liability.
Here, assumed he has not investment towards any deductions and exemptions (eg. 80C, 80D, 24B, etc.).
Tax Calculation under Old Tax System.
| Income Slab From | Income Slab To | Taxable Difference | After Deduction | Tax Rate | Tax |
| – | 250,000.00 | 250,000.00 | – | – | – |
| 250,000.00 | 500,000.00 | 250,000.00 | – | 5% | 12,500.00 |
| 500,000.00 | 1,000,000.00 | 500,000.00 | – | 20% | 100,000.00 |
| 1,000,000.00 | 1,500,000.00 | 500,000.00 | – | 30% | 150,000.00 |
| Tax | 262,500.00 | ||||
| Add: 4% education cess | 10,500.00 | ||||
| Final Tax Payable | 273,000.00 |
Tax Calculations under New Tax System.
| Income Slab From | Income Slab To | Taxable Difference | After Deduction | Tax Rate | Tax |
| – | 250,000.00 | 250,000.00 | – | – | – |
| 250,000.00 | 500,000.00 | 250,000.00 | – | 5% | 12,500.00 |
| 500,000.00 | 750,000.00 | 250,000.00 | – | 10% | 25,000.00 |
| 750,000.00 | 1,000,000.00 | 250,000.00 | – | 15% | 37,500.00 |
| 1,000,000.00 | 1,250,000.00 | 250,000.00 | – | 20% | 50,000.00 |
| 1,250,000.00 | 1,500,000.00 | 250,000.00 | – | 25% | 62,500.00 |
| Tax | 187,500.00 | ||||
| Add: 4% education cess | 7,500.00 | ||||
| Final Tax Payable | 195,000.00 |
In this case the New Tax System saves the tax as compared to Old Tax System. Total saving of Rs. 78,000.
Now, letz take some important changes review on changes in New Tax System.
- U/s 194J (Fees) – TDS has been deducted to 2% from 10%
- Tax Audit limit extended from Rs 1 crore to Rs 5 crore, the turnover/gross receipts does not exceed 5% cash transactions.
- Dividend Distribution Tax (DDT) has been discontinued, the recipient of the dividend have to pay tax at their applicable rate.
- U/s 194 Dividend paid by mutual fund to a resident TDS of 10% will be deducted if dividend amount exceeds Rs 5,000 during the financial year.
In other words, out of 100 deductions and exemptions; the government has removed 70 in the New Tax System.
Important things to know about this New Tax System.
- If individual have a business income & he wishes to go for New Tax System then there is no option to come back to the other system once you have selected your choice or vice-a-versa.
- If you are a salaried person, then you have a option to choose the New or Old Tax System each year, there is no clause like above point.
As I said above, those who want to take more deductions & exemptions and wants to save more tax they should go for Old Tax System. And those who are not wish to invest for the purpose of 80C, 80D, 24B, etc., they should go for New Tax System.
New Tax System is best for those who don’t have any idea of investment.
Important Note: Please consult your Chartered Accountant (CA), as they will give you more clear way.
Maybe in future government wishes to remove all the exemptions and in the future they are planning to keep constant tax system.
After all, keep one thing in mind if you wish to go for New Tax System, you have forget about all the deductions and exemptions as it’s available in Old Tax System.
Note:- All above changes will be applicable only when the Finance Bill 2020 proposal will be passed in Parliament.
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