Income Tax Calculation for FY 2020-21 | New & Old Regime Comparison

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From FY 2020-21, an individual taxpayer will have an option to choose between existing and new tax regime. In order to know which tax regime is beneficial for an individual, it is important to know how much will be the tax liability in both regimes.

The old tax slabs will also continue and employees will have a choice to opt either of them.

Whether an employee chooses the new tax regime or the old one depends on a case-to-case basis and they will have to give up on a lot of deductions that could help reduce taxable income.

From April 1, 2020, an individual taxpayer will have the option either to continue with the existing tax regime or opt for the new tax regime sans 70 tax exemptions and deductions. Salaried individuals, having no business income, will have to choose between the existing and new tax regimes every financial year, as per their convenience.

New Tax Regime is optional

On the other hand, those who have business income should carefully evaluate whether they want to continue with the existing tax regime or opt for the new tax regime. This is because once they opt for the new tax regime, then they can switch back to the existing tax regime only once in a lifetime.

To choose between the new and existing tax structures, it is important that you know how much will be your tax liability in both regimes.

Given below are the income tax slabs that are applicable in the new tax regime for individuals.

New Tax Regime Slabs

Serial No.Income SlabsIncome Tax Rates
1Up to Rs 2.5 lakhNIL
2Between Rs 2,50,001 and Rs 5 lakh5.00%
3Between Rs 5,00,001 and Rs 7.5 lakh10.00%
4Between Rs 7,50,001 and Rs 10 lakh15.00%
5Between Rs 10,00,001 and Rs 12.5 lakh20.00%
6Between Rs 12,50,001and Rs 15 lakh25.00%
7Above Rs 15 lakh30.00%
Surcharge is levied on income above ₹ 50 lakh.
Health and Education cess at the rate of 4 per cent will be added to the income tax liability in all cases.
Individuals having taxable income of ₹ 5 lakh will be eligible for tax rebate under section 87A up to ₹ 12,500, thereby making zero tax payable in the new tax regime.

Under the new tax rates, there is zero tax for income up to ₹ 2.5 lakh; 5% for income between ₹ 2.5 lakh and up to ₹ 5 lakh; 10% for income between ₹ 5 lakh and up to ₹ 7.5 lakh; 15% for income between ₹ 7.5 lakh and up to ₹ 10 lakh; 20% for income between ₹ 10 lakh and up to ₹ 12.5 lakh; 25% for income between ₹ 12.5 lakh and up to ₹ 15 lakh; 30% for income above ₹ 15 lakh.

Under the new tax regime, an individual is eligible for only one deduction under section 80CCD (2). This section allows deduction on the employer’s contribution to the NPS account for maximum of 10 per cent of the employee’s salary (salary here means basic plus dearness allowance).

Income Tax Calculation under new tax regime for FY 2020-21

The calculation of income tax that you are liable to pay under the new tax regime can be explained with an example.

Total Income in FY 2020-211,860,000.00Suppose your total income in FY 2020-21 is ₹ 18.6 lakh
Deduction60,000.00Employer contribution to your NPS account (80CCD (2))

Summary & Explanation

Income SlabsTax RatesTaxable Income (in ₹)Tax Amount (in ₹)
Up to ₹ 2.5 lakh0.00%1,800,000.000.00
Between ₹ 2,50,001 and ₹ 5 lakh50.00%1,550,000.0012,500.00
Between ₹ 5,00,001 and ₹ 7.5 lakh10.00%1,300,000.0025,000.00
Between ₹ 7,50,001 and ₹ 10 lakh15.00%1,050,000.0037,500.00
Between ₹ 10,00,001 and ₹ 12.5 lakh20.00%800,000.0050,000.00
Between ₹ 12,50,001and ₹ 15 lakh25.00%550,000.0062,500.00
Above ₹ 15 lakh30.00%300,000.0090,000.00

Suppose your total income in FY 2020-21 is ₹ 18,60,000.00 (18.6 lakh). Further, during the year, your employer has contributed ₹ 60,000 to your NPS account, which is eligible for deduction under section 80CCD (2). Therefore, your net taxable income will be ₹ 18,00,000 (₹ 18.6 lakh minus ₹ 60,000).

The income tax liability in the new tax regime will be calculated on ₹ 18.00 lakh. There will be no tax on the first ₹ 2.5 lakh from ₹ 18.00 lakh income as mentioned above in the table in point 1. The income which is still chargeable to tax now left will be ₹ 15.50 lakh (₹ 18.00 lakh minus ₹ 2.5 lakh).

The next ₹ 2.5 lakh (₹ 5 lakh minus the exempt ₹ 2.5 lakh) from ₹ 15.50 lakh will be taxed at 5 per cent as mentioned in point 2 in the table above. The tax amount here will be ₹ 12,500.

The income left chargeable to tax will be ₹ 13,00,000. Out of this, the next ₹ 2.5 lakh (₹ 7.5 lakh minus ₹ 5 lakh) will be taxed at 10 per cent as mentioned in point 3. The tax amount comes out to be ₹ 25,000.

Adding the tax liability from points 1,2 and3, at this point, the total tax liability comes to ₹ 37,500 (0 + 12,500 + 25,000).
At this point, the income which is still chargeable to tax is ₹ 10,50,000. From point 4, ₹ 2.5 lakh (₹ 10 lakh minus ₹ 7.5 lakh) will be taxed at 15 per cent and the tax liability is ₹ 37,500.

After point 4, the income left for taxation is ₹ 8,00,000. From point 5, the next ₹ 2.5 lakh (₹ 12.5 lakh minus ₹ 10 lakh) will be taxed at 20 per cent. The tax liability comes out to be ₹ 50,000.

The income left chargeable for tax is ₹ 5,50,000. As mentioned in point 6, out of this, ₹ 2.5 lakh (₹ 15 lakh minus ₹ 12.5 lakh) will be taxed at 25 per cent. The tax liability will be ₹ 62,500.

Only ₹ 3,00,000 is left which is still to be taxed. As mentioned in the table above, from point 7, this will be taxed at 30 per cent. The tax liability will be ₹ 90,000.

The total tax liability in the new tax regime comes out to be ₹ 2,77,500 ( 0 + 12,500 + 25,000 + 37,500 + 50,000 + 62,500 + 90,000). Health and education cess will be added to this at the rate of 4 per cent. The cess amount is ₹ 11,100.

Therefore, in new tax regime, the total tax liability will be ₹ 2,88,600.

Income Tax Calculation under old (existing) tax regime for FY 2020-21

You are required to compare this with the tax liability under the existing tax regime. The calculation of income tax under the existing tax regime works in a similar way. First, you are required to deduct all the tax exemptions and deductions that you are eligible for from your gross total income and then calculate your tax liability on the net taxable income. Click here to read more about it.

Total Income in FY 2020-211,860,000.00Suppose your total income in FY 2020-21 is ₹ 18.6 lakh
Standard Deductions50,000.00 
Other Deductions and tax exemptions260,000.00Your investments in LIC, ELSS, NPS etc., for 80C, 80CCD etc.

Summary & Explanation

Income SlabsTax RatesTaxable Income (in ₹)Tax Amount (in ₹)
Up to ₹ 2.5 lakh0.00%1,550,000.000.00
Between ₹ 2,50,001 and ₹ 5 lakh5.00%1,300,000.0012,500.00
Between ₹ 5,00,001 and ₹ 10 lakh20.00%8,00,000.00100,000.00
Above ₹ 10 lakh30.00%5,50,000.001,65,000.00
Income tax slabs applicable to resident individuals below the age of 60 years for FY2019-20.
Surcharge is applicable from income above ₹ 50 lakh. Health and Education cess at rate of 4% will be added to the income tax payable in all cases.
Rebate of ₹ 12,500 is available for individuals having net taxable income of up to ₹ 5 lakh under section 87A.

New Tax Regime Vs Old Tax Regime

ParticularsTax payable in New RegimeTax payable in Old Regime
Gross Salary1,860,000.001,860,000.00
Standary Deductions 50,000.00
Income under the head salary1,860,000.001,810,000.00
Deductions and tax exemptions60,000.00260,000.00
Income under the head salary1,800,000.001,550,000.00
Income Tax277,500.00277,500.00
Less: Rebate under section 87A  
Total tax payable after Rebate277,500.00277,500.00
Education Cess @ 4.00%11,100.0011,100.00
Total tax, surcharge and education cess288,600.00288,600.00

Another way to compare between new and existing tax regimes is by checking how many deductions and/or tax exemptions that one must claim so that tax liability is same in both the tax regimes.

Conclusion

As shown in the table above, under the existing regime, if an individual is able to save or claim deductions and tax exemptions of ₹ 3,10,000 (₹ 50,000 plus ₹ 2,60,000), then he/she will remain tax neutral in both regimes.

However, if the total deductions and tax exemptions claimed by an individual is less than ₹ 3,10,000, then the individual should opt for the new tax regime as it will involve lower tax liability.

The income tax department has issued a clarification for those who want to opt for the new tax slabs as announced in Budget 2020 and which came into effect from April 1 this year.

Opt for new tax regime if your claimed tax exemptions are less than ₹ 3,10,000.00.

The New Tax Regime has proposed lower income-tax rates, for income segments up to Rs 15 lakh. But you need to remember that the proposed lower tax rates will be applicable only if you are willing to give up exemptions and deductions available under various provisions of the Income-tax Act, 1961.

Old regime better option for high-income earners.

This means that when you choose the New Tax Regime, you will have to forgo some exemptions [such as Leave Travel Allowance (LTA), House Rent Allowance (HRA), etc] and deductions available under chapter VI A of the Act that grant deductions under Section 80 [such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G, 80GG, 80GGA, 80GGC, etc].

Only the deduction under Section 80CCD(2) [i.e., employer’s contribution on account of an employee in a notified pension scheme] and Section 80JJAA [i.e. for new employment] can be claimed.

Even the Standard Deduction under Section 16 [which is currently Rs 50,000] available to salaried individuals and the deduction on home loan interest, under Section 24(b) will be disallowed. Around 70 exemptions and deductions have been removed in the New Tax Regime.

Additional Notes

The Central Board of Direct Taxes (CBDT) has said in the circular that employers can seek a declaration from employees and deduct tax at source (TDS) according to the old tax regime or the new concessional tax rates, as opted by the employee.

Section 192 of the Income Tax Act, 1961, says that every employer has to mandatorily deduct tax while paying salary to the employee. The tax rate should be in line with the applicable income-tax slab.

However, with the dual income-tax slabs and rates available to the employees for the financial year 2021, there was confusion on how tax should be deducted on salary.

Once you opt between new or old tax regime, your employer will not permit any changes at the time of making final investment declaration in January or February. But if in case you change your mind you can exercise your choice at the time of filing your returns by July 31, 2021.

Here are the clarifications by the income tax department:

  • Employees, who do not have income from business or profession, will have to inform their employers about their intention to opt for the new tax regime for deduction of tax at source or TDS from their salaries
  • They will continue to be taxed under the older slabs present in the IT act, if they do not exercise the option
  • It will be applicable for the year and can’t be modified once employees inform the employer about their intention to opt for the new concessional tax rates for TDS
  • According to the IT department, an employee can change the option of tax structure at the time of filing income tax return and the amount of TDS payment will be adjusted accordingly
  • “The deductor shall compute his total income and make TDS thereon in accordance with the provision of Section 115 BAC of the (Income Tax) Act. If such intimation is not made by the employee, the employer shall make TDS without considering the provision of Section 115 BAC of the Act,” the department said.


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