New income tax slabs vs old: Which is better for an Income of ₹ 12.5 lakhs per annum

New income tax slabs vs old: Which is better for an Income of ₹ 12.5 lakhs per annum
What has changed with taxation in the Union Budget 2020-21 is one of the most asked questions among the taxpayers. The latest budget has relaxed the burden of the taxpayers by providing two options to choose from like never before in history. Announcing a cut on the existing tax rates prevailing across four taxation slabs, Finance Minister Nirmala Sitharaman said the taxpayers can either choose to continue with the old tax regime bundled with concessions and deductions or go with the newly lowered tax rates.

Changes you need to know in the new taxation regime 2020-21

Notably, only those taxpayers who do not have any income through business are allowed to move to the new tax regime. The lowered tax rates are applied on four tax slabs as given under. The lowering of tax rates applies to four tax slabs within the income range of Rs. 5 lakhs to Rs. 15 lakhs. The tax rate for incomes between Rs. 5 lakh and Rs. 7.5 lakhs has been lowered from 20 percent to 10 percent. The tax slab that covers incomes from Rs. 7.5 lakhs to Rs. 10 lakhs will invite a tax rate of 15 percent instead of the 20 percent tax rate levied earlier. The next tax slab of earnings from Rs 10 lakhs and Rs. 12.5 lakhs will be covered under 20 percent taxation instead of the previous tax rate of 30 percent. The same rate of tax is applicable to the tax slab referring to the earnings between Rs. 12.5 and Rs. 15 lakhs. There are no changes with regard to the tax rates applicable to the incomes below Rs. 5 lakhs and above Rs. 15 lakhs.

How to choose between the two options for maximizing tax benefits

As per the announcement by the FM Nirmala Sitharaman, it is evident that the taxpayers are given two options while paying taxes. Explaining the present change, she said, "An individual who is currently availing more deductions and exemption under the Income-tax Act may choose to avail them and continue to pay tax in the old regime." While choosing to remain with the older tax rates, the taxpayers will also enjoy the advantages of the deductions and concessions that are a part of the older tax regime. They can benefit from the lowered tax rates if they choose to be covered by it. However, in this case, the deductions and concessions that were granted by the older tax regime will cease to apply.


Which option can fetch the maximum tax benefits to the taxpayers earning Rs 12.5 lakhs per annum

One of the daunting questions in front of the taxpayers is whether to remain with the older tax regime or move on to the new tax regime so that they can reduce the taxes they will need to pay.

The answer is not far to seek. If the taxpayer plans to make use of only the standard deductions and concessions under Section 80C (investments, expenses, and life insurance premiums of up to Rs. 1.5 lakhs) available under the old tax regime and nothing more, subscribing to the new tax regime will provide a significant tax saving advantage.

In case, the taxpayers have ways to make claims also under other sections like Section 80D, Section 24, Section 80E, Section 16, and Section 10, it is better for them to remain with the older tax regime as they will have a number of ways to project a lower taxable income and hence will make a far better saving on taxes.

Here is a case study that will help make an informed decision in this regard. Consider Ram is making a taxable income of Rs. 12.5 lakhs per annum. If he wants to make use of only the standard deductions under Section 80C, the comparative value of taxes he will need to pay while opting for the two options is given under.

DescriptionTaxation under the old regime (In Rs.)Taxation under the new regime (In Rs.)
Deduction applicable under Section 80C1,50,000Nil
Net Taxable income11,00,00012,50,000
Net tax1,48,2001,30,000
Saving you will make while opting for the new tax regime18,200