New Vs Old Tax Slabs FY 2020-21: Which is Better + Calculator

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The Budget 2020 proposed to restructure the income tax slabs.

So it’s natural that people will begin asking: Which is better for tax-payers in India: New Tax Slab or Old Tax Slab from Financial Year 2020-21 onwards? And to be honest, this is another (new) question that has now been added to the list of ever-expanding tax-related dilemmas that Indians have.

But is the proposed and so-called simplified new income tax structure beneficial for individuals? We shall be discussing that in the post.

As you already know (and as was widely expected and demanded), the personal income tax rates have been (in a way) cut. But there is a big catch.

The Budget 2020 proposed a new set of (optional) tax slabs that has lower tax rates compared to the old one. These new tax slabs are available for those who give up all deductions and exemptions. And since the new slabs are optional, you have the option of staying with the old tax slabs for now (alongwith all the exemptions and deductions).

According to the government and Budget 2020 speech, this is a move to simplify the tax regime and is a step towards the direct tax code in the long term. This may be true. But I feel that in the shorter term, this new tax structure is of little use and unnecessary for most people. I will explain this why in later parts of the post.

Ironically, it all started with something like the Budget 2020 would try to “…simplify the Income Tax Act…” But simplifying means different things to different people I guess.

So by the time Budget 2020 speech was over, it became very clear that even though the intent may have been right, the end result was a further complication. I am sure my CA friends will now be delighted. (If it interests you, then you can have a look at this 100+ page 2020 Finance Bill in detail as well).

But before I move forward, let me remind you that I am not a tax expert. So my understanding is fairly limited. And since many people are reborn as economists and tax experts around budget, let me assure you that I am not one of them. J

So let’s move on and see what has changed.

New Income Tax Slabs vs Old Tax Slabs (FY 2020-21)

As per the new tax structure, if you wish to opt for the New Tax Slab Rates, then you will have to give up existing Income Tax Deductions and Exemptions, like HRA, Section 80C, Home loan tax benefits etc.

Here are the latest Income Tax Slab Rates FY 2020-21 (Assessment Year 2021-22):

  • Income Zero to Rs 2.5 lakh = No tax
  • Income Rs 2.5 lakh to Rs 5 lakh = 5%
  • Income Rs 5 lakh to Rs 7.5 lakh = 10%
  • Income Rs 7.5 lakh to Rs 10 lakh = 15%
  • Income Rs 10 lakh to Rs 12.5 lakh = 20%
  • Income Rs 12.5 lakh to Rs 15 lakh = 25%
  • Income Rs 15 lakh and above = 30%

This is the new optional tax structure.

In addition and as was the norm earlier too, the following will be applicable as well:

  • 4% Education cess on the tax amount
  • 10% Surcharge applicable if income > Rs 50 lac and 15% if income > Rs 1 Cr

Note: If the tax proposals are passed, then these new tax slabs will be applicable from 1st April 2020 to 31st March 2021.

In case you wish to continue claiming your tax deductions and exemptions, then you can stick with the Old Tax Slabs structure as per the existing (FY 2019-20) income tax slab rates:

  • Income Zero to Rs 2.5 lakh = No tax
  • Income Rs 2.5 lakh to Rs 5 lakh = 5%
  • Income Rs 5 lakh to Rs 10 lakh = 20%
  • Income Rs 10 lakh and above = 30%

Note – In either case, that is in both new and old tax structure, if your income is less than Rs 5 lac, then you don’t pay any tax as was proposed last year: read No tax for Rs 5 lakh income due to the tax rebate under Section 87A. According to the rule, a person earning up to Rs 5 lacs gets a tax rebate of Rs 12,500, which effectively means that if someone’s taxable income is less than Rs 5 lac, then they will not have to pay any taxes.

Here is a comparative summary:

New Vs Old Income Tax Slab

And unlike old tax rates that provided relaxation for senior citizens (60+ age) and super senior citizens (80+ age), the new tax structure is same for all categories of taxpayers irrespective of their age.

As already mentioned, if you do opt for the new (lower) tax structure, then you will lose the following deductions & exemptions:

There are many others but these are the important ones that I could immediately recall. In fact and as per the government, out of more than 100 deductions and exemptions that are currently available to taxpayers, around 70 of them will not be available under the new tax slab regime.

And in words of the Budget papers, “the individual taxpayers opting for the new tax structure cannot avail any deduction under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA).”

So basically and for all practical purposes, you simply pay tax on your total income at the slab rates, in the new tax system.

Which is better: Old Tax Slabs Or New Tax Slabs?

That’s the most important question that many of you have.

But let’s be honest. At the face of it, the new tax slabs look friendlier as they have lower rates. But the revised graded approach to hiking tax rates also comes with the mandatory loss of all the major deductions which are available with the old tax slabs.

In general, the new tax slabs don’t serve a great purpose as those who were taking the benefit of various deductions anyways, were already able to bring down their taxable income considerably. So they were already paying a lower tax due to lower effective tax rate. It is only those who were unable to utilize any (or most) of the exemption/deductions who stand to benefit from the new tax slabs.

Let’s take a few examples and this will be very clear.

Example 1: A person earning Rs 15 lac a year and who was not using any commonly available deductions (like Section 80C, 24B, etc.)

Tax under Old Tax Slabs

  • Rs 0 – 2.5 lakh: Rs 0
  • Rs 2.5 – 5 lakh: 5% of (5 – 2.5 lakh) = Rs 12,500
  • Rs 5 – 10 lakh: 20% of (10 – 5 lakh) = Rs 1,00,000
  • Rs 10 – 15 lakh: 30% of (15 – 10 lakh) = Rs 1,50,000
  • Total Tax = Rs 2.625 lakh
  • Cess = 4% of Rs 2.625 lakh = Rs 10,500
  • Total (as per Old Tax Slab) = Rs 2.73 lakh

Tax under New Tax Slabs

  • Rs 0 – 2.5 lakh: Rs 0
  • Rs 2.5 – 5 lakh: 5% of (5 – 2.5 lakh) = Rs 12,500
  • Rs 5 – 7.5 lakh: 10% of (7.5 – 5 lakh) = Rs 25,000
  • Rs 7.5 – 10 lakh: 15% of (10 – 7.5 lakh) = Rs 37,500
  • Rs 10 – 12.5 lakh: 20% of (12.5 – 10 lakh) = Rs 50,000
  • Rs 12.5 – 15 lakh: 25% of (15.0 – 12.5 lakh) = Rs 62,500
  • Total Tax = Rs 1.875 lakh
  • Cess = 4% of Rs 1.87 lakh = Rs 7500
  • Total (as per New Tax Slab) = Rs 1.95 lakh

So the difference between the Old Tax Slab and New Tax Slab (in this case) is that in new regime, this person can save Rs 78,000 (Rs 2.73 lac – Rs 1.95 lac).

But remember that in this hypothetical example, we did not consider any deduction even in the old tax slab system. And that is generally not the case. Most people do use some deduction or the other.

So let’s use a more realistic example.

Example 2: A person earning Rs 15 lac a year and who fully uses Rs 1.5 limit of Section 80C, pays home loan interest of Rs 1.6 lac, health insurance premium of Rs 17,000 and being salaried, gets a standard deduction of Rs 50,000 as well. So on a income of Rs 15 lac, this person gets deduction of Rs 1.5 lac + Rs 1.6 lac + Rs 50,000 + Rs 17,000 = Rs 3.77 lac.

Now let’s see how his tax liability changes in either tax structures.

Tax under Old Tax Slabs

His Net Taxable Income is Rs 15 lac – Rs 3.77 lac (deductions) = Rs 11.23 lac.

  • Rs 0 – 2.5 lakh: Rs 0
  • Rs 2.5 – 5 lakh: 5% of (5 – 2.5 lakh) = Rs 12,500
  • Rs 5 – 10 lakh: 20% of (10 – 5 lakh) = Rs 1,00,000
  • Rs 10 – 15 lakh: 30% of (11.23 – 10 lakh) = Rs 36,900
  • Total Tax = Rs 1,49,400
  • Cess = 4% of Rs 1,49,400 = Rs 5976
  • Total (as per Old Tax Slab) = Rs 1.55 lakh

Tax under New Tax Slabs

In the new slab, there are no deductions. So taxable income is the full amount of Rs 15 lac:

  • Rs 0 – 2.5 lakh: Rs 0
  • Rs 2.5 – 5 lakh: 5% of (5 – 2.5 lakh) = Rs 12,500
  • Rs 5 – 7.5 lakh: 10% of (7.5 – 5 lakh) = Rs 25,000
  • Rs 7.5 – 10 lakh: 15% of (10 – 7.5 lakh) = Rs 37,500
  • Rs 10 – 12.5 lakh: 20% of (12.5 – 10 lakh) = Rs 50,000
  • Rs 12.5 – 15 lakh: 25% of (15 – 12.5 lakh) = Rs 62,500
  • Total Tax = Rs 1.875 lakh
  • Cess = 4% of Rs 1.87 lakh = Rs 7500
  • Total (as per New Tax Slab) = Rs 1.95 lakh

In this case, the old tax system works better. The difference between the Old Tax Slab and New Tax Slab (in this case) is that in the new regime, you end up paying Rs 40,000 more (Rs 1.95 lac – Rs 1.55 lac).

So basically, every person will have his own unique New Tax Slab Vs Old Tax Slab calculation as the deductions claimed by the person may be unique to him.

And to find out if the new tax slabs are more beneficial, each individual tax payer will ideally have to do their own calculations. And depending on the level of deductions and exemptions being claimed (or possible), the answer to this question: which is better to pick between new vs old tax system, can be given.

I did some simple number crunching and found that for most people, who use exemptions for HRA, standard deduction, full Section 80C, etc., it seems unlikely that the new tax slab will be beneficial.

So to find out which of the New Income Tax Slab Rates Vs Old Income Tax Slab Rates is beneficial, you will have to do some number crunching. Or take help of your Chartered Accountant. And since the next tax slabs are available from the Financial Year 2020-21 onwards, you will have to be ready with your decision (to pick between new tax rate vs old tax rates) in Assessment Year 2021-22. So it’s important to understand the difference between new and old tax slabs.

Old Vs New Tax Calculator (FY 2020-21)

As I said earlier, each person will have to do their own calculation to find out which tax structure is better for them. Is the new income tax slab good? Or are the old income tax slabs better?

I have created a very basic calculator to get you going.

I strongly suggest that you treat it as a first step and not as the final one. It’s better to get in touch with your CA to check which option is actually better for you. But you can try out this calculator to see how the dynamics of old vs new slabs effect you.

Here is a screenshot of the calculator and how it provides the analysis in a simple format:

New Vs Old Income Tax Slab calculator

Here is a link to download this excel based calculator free:

New Vs Old Tax Slab Calculator FY 2020-21 (Free Download)

 

So you can use this simple excel based tax calculator to choose between new tax slabs and the old tax slabs. But do check with your CAs to assess what is actually right for you. Also, the income tax department has provided an online tax calculator on its website. Here is the link to the calculator. As per the site, the calculator is meant to provide a basic idea of the estimated impact of the new changes in tax slabs.

What else should you know?

If you are a regular salaried person, then as of now, you can choose between the New vs Old tax system each year. But if you have any business income, then you will not be able to switch back to the other system once you have made a choice.

I must say something here. And it may sound repetitive. I apologize in advance for the repetition.

Trying to save taxes by optimizing your choice of tax slabs is fine. But you should not give priority to tax saving. Instead, you need to figure out whether you are saving enough for your real goals or not. And if you aren’t, then that’s a bigger problem for you which will come back to haunt you much later and you will be unable to do anything about it.

Remember, you cannot tell your child that you were unable to save enough money for his education (children’s higher education) as you did not focus on proper saving but on maximizing your tax saving. Same is the case with your Retirement Planning. You can’t screw it up just because you wanted to maximize your tax savings.

So all investments should be goal-driven and your focus should be Goal-based Investing. That is, you find out your goal requirements and then invest accordingly. Tax saving is a secondary thing. I have written something on this earlier which may be a good read in current times – Why tax planning is not enough?

What else should you ponder over?

It’s now perfectly clear that in the long run, the government wishes to remove all the exemptions. And this parallel system of old and new tax slabs is the first step towards that. The intention is to gradually “reduce rates and simplify structure” and for that to happen, the government will gradually remove all exemptions in years to come. So we should be ready to accept this new reality.

This intent to remove the exemptions is fine from a structural perspective. But I have a concern.

Right or wrong, many Indians used to do some investments (and insurances) in the name of saving taxes by means of deductions/exemptions. These tax exemptions and deductions were in effect nudges that pushed them to save for their future.

Now if there is an option to forgo all deduction (as introduced in new tax slabs of Budget 2020) and there is a clear indication that the government wishes to remove all the exemptions in the long run, is it possible that this important nudge ‘to save’ will go away, and thereby, further reduce the savings rate of Indians? I think its quite possible. And this is not the best thing to happen.

For those who do not understand the need to save and invest regularly, these exemptions helped in forced savings.

This may now lead to an irreversible and long term change in saving/investment trends for young Indians and may discourage savings. Hazarding an informed guess here, I think a majority of Indians who managed to save something over the years was because they were indirectly forced to save by baiting them with tax saving.

It seems that the new tax regime (which is moving towards zero exemptions) is based on the idea that what a person does with their money is up to them. So if they want to save, it’s up to them. If they don’t want to save, it’s also up to them.

Not much to add now.

But yeah… after years, the much-awaited trade-off of lower tax rates and no exemption is here on the ground. No doubt, it will reduce the incentive to save for many people who aren’t very financially disciplined. But who am I to say anything. 🙂

The Budget 2020 has introduced optional new tax slabs which offer lower tax rates if the taxpayer is willing to give up the exemptions. But as we saw, the devil lies in details and each taxpayer will have to do his own calculations to figure out which is better: new tax slab or the old tax slab when it comes to Income taxes in 2020-21

But it does seem that for most salaried people who were already using their exemptions smartly, this new regime of multiple slabs is not very useful. And the majority may be better of staying with the old tax slabs.

Remember that after all, to take benefit of the new slabs, you will have to forego all exemptions available under the old tax slabs. And that may not be worth it mathematically speaking.

12 comments

  1. Thanks Dev for this article & the excel calculator. I was afraid of the same, that Govt. intends to remove all exemptions in near future. (Is this to divert the money flow to markets?) Then, next would be, tax the EEE category.

  2. One thing for sure, Govt is planning for bigger step like demonotization in an overnight announcement.
    Within couple of year, All the exemption will stopped and One India One tax system will be followed to make the system across nation simpler.

  3. As of now, Government has just introduced these tax slabs and not made it compulsory. However, by the style of speaking of FM during budget speech, I think they might soon make it compulsory too!

  4. what about the dividend taxation? will it be added to total income and taxed at slab rate (in both old and new system) or any different?

    also, what about dividend taxation for nri?

  5. Thanks for this valuable and fruitful sharing. you have all the basic details that was needed to be covered. It will really help the reader still who is having a zero knowledge of investment.

  6. the XL calculator helped to me decide which tax regime is good for me. Thanks Dev.
    What i can say to users here is, if you guys are going to claim HRA & 80C then stick with OLD regime. Hopefully Iam correct here.

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