Income Taxpayers in India: Advantages and Disadvantages of New and Old Income Tax System

The new tax regime differs from the old system in two respects. Firstly, it has more slabs with lower tax rate and secondly, all the major exemptions and deductions available to the taxpayers in the existing (old) tax regime are not allowed if the new tax regime ( New Tax Regime) is selected. According to the CBDT circular issued on April 13, 2020, all the employers should take a declaration from their employees if they want to opt for the new tax regime. However, employees will still have the right to choose between tax regimes when filing returns. According to experts, individuals opting for the new tax regime have to forgo certain exemptions and deductions that were available with the old system.

List of key exemptions and deductions that taxpayers will have to omit if they opt for the new regime
(i) Leave Travel Allowance exemption which is currently available to salaried employees twice in a block of four years.
(ii) House Rent Allowance ordinarily paid to salaried persons as part of the salary.
(iii) Standard deduction of Rs.50,000 currently available for salaried taxpayers.
(iv) The deduction available under section 80TTA/80TTB i.e. deduction in respect of interest on deposits in savings account) and 80TTB (deduction in respect of interest on deposits to senior citizens) will not be available to taxpayers.
(v) Deduction for entertainment allowance (for Government servants) and employment/professional tax contained in section 16.
(vi) Tax benefit under section 24 on interest paid on housing loan taken for self-occupied or vacant house property.
(vii) Allowed deduction of Rs.15000 from family pension under clause (ii) of section 57.
(viii) The deduction claimed for medical insurance premium under section 80D will also not be claimable.
(ix) Tax benefits for disability under section 80DD and 80DDB will not be claimed.
(x) Tax exemption on interest paid on education loan under section 80E will not be claimed.
(xi) Tax exemption will not be available on donations to charitable institutions available under section 80G.
xii) All deductions under Chapter VIA (eg Section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E,80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80 – IB, 80-IBA, etc. will not be claimable for those opting for the new tax regime.

This can be claimed
Deduction under sub-section (2) of section 80CCD (employer’s contribution to employee’s account in notified pension scheme-mostly NPS) and deduction under section 80JJAA (for new employment) can still be claimed.

Benefit
old tax regime
1) Encouragement to inculcate the habit of saving.
2) Investment servings as a source of passive income.
3) Helps to beat inflation through investment.

the new order:
1) Low tax rates and low compliance.
2) Greater disposable income.
3) Increase in liquidity.
4) Greater flexibility in building objective-based investment portfolios.

Harm
Old tax regime:
1) The lock-in period of investment affects the liquidity.
2) Low disposable income.
3) Limited options for tax saving investments.
4) The hassle of maintaining proof of deductions claimed.

the new order:
1) Non-availability of tax deduction.
2) Less flexibility in choosing a new regime for people with business income.
3) Lack of auto mechanism to inculcate the habit of saving.