The new tax system was introduced on the 1st February 2020 under the Union Budget for 2020-21. The said tax system comes with 7 progressive income tax slabs and intends to solve the problems of taxpayers belonging to the low-income groups.

Notably, the new tax regime is optional and is directed towards those taxpayers who intend to opt-out of tax deductions and exemptions to witness a much simpler tax structure.

Nonetheless, before opting out of the old tax regime, taxpayers must become familiar with the fundamentals of the new system. Also, they should weigh in the accompanying pros and cons to make a more informed decision and to facilitate better tax savings.

Income tax slabs under the new tax system

Under the new system, the income tax slabs will attract taxes in these ways –

  • 1st Income tax slab – Income up to Rs.2.5 lakh is exempted from tax.
  • 2nd Income tax slab – Annual earnings between Rs.2.5 lakh and Rs.5 lakh will be taxed at the rate of 5%.
  • 3rd Income tax slab – Income over Rs.5 lakh and up to Rs.7.5 lakh will attract a tax at the rate of 10%.
  • 4th Income tax slab – Annual income over Rs.7.5 lakh and up to Rs.10 lakh will be subject to 15% taxation.
  • 5th Income tax slab – Earnings over Rs.10 lakh and up to Rs.12.5 lakh will attract a tax of 20%.
  • 6th Income tax slab – Income over Rs.12.5 lakh and up to Rs.15 lakh will be taxed at the rate of 25%.
  • 7th Income tax slab – Annual earnings over Rs.15 lakh will be subject to taxes at the rate of 30%.

All individuals will be taxed as per their annual income tax slab irrespective of their age. As per the government’s claim, this new and simplified tax regime will prove significantly beneficial for taxpayers. Nonetheless, financial experts suggest that taxpayers should factor in both the benefits and the drawbacks of the new tax regime.

Advantages of the new tax regime

Taxpayers will benefit in these ways under the new income tax slabs –

  • Individuals, especially young employees and those with low investments will attract taxation at a lower rate. Despite giving up on deductions, they will have more disposable income at hand.
  • Tax filing process under the new structure is said to be relatively easy and less cumbersome. Individuals with a few investments or none can now file their taxes more easily under the new system. Also, with the help of an online income tax calculator, taxpayers can compute their taxes more comfortably.
  • Being an optional tax regime, taxpayers can switch over from the old system to the new and vice versa after evaluation. Based on the evaluation report, the taxpayer can decide which tax regime is more suitable for their requirement.

Notably, tax payers are entitled to only one tax deduction under the new regime, i.e. Section 80CCD (2). It is applicable on employers’ contribution towards employees’ NPS accounts.

Drawbacks of the new tax regime

The disadvantages are discussed below –

  • As many as 70 exemptions including Section 80C are excluded under the new tax regime. Also, business owners will not be able to switch from one tax regime to another.
  • Individuals who had invested in tax saving investment schemes like NOS, PPF, etc. will not be able to claim deductions under the new tax regime.
  • Despite a reduction in the income tax rate, financial experts predict that it will affect the long-term savings of individuals negatively.
  • The option to choose between the old and new tax structure will further complicate the income tax returns filing and confuse taxpayers.
  • The real estate sector may also stagger under this new regime. Typically, investing in housing property is looked as a significant tax saving avenue for home buyers and helps them to save more on their purchase. For instance, home loan borrowers are entitled to claim a tax deduction of up to Rs.2 lakh on interest paid on loan value.

Read: Follow This Guide and Avail EPFO and Income Tax Benefits on Your Home Loan 

However, with forego of exemption under the new regime, other tax benefits for under-construction propertyor constructed one will also be unavailable to real estate investors.

Nonetheless, housing loan borrowers can save significantly on their loan by availing the same from a leading financial institution that extends an affordable rate of interest. They may also consider co-applying for a housing credit to enjoy the benefits of taking a joint home loan.

Leading financial institutions also provide their customers with pre-approved offers to make their loan availing experience worthwhile and smooth. Such offers accompany financial products like home loans and loans against property. Check your pre-approved offer by entering your name and contact details.

The new income tax slabs provide immediate tax relief to individuals. Regardless, taxpayers must factor in its effectiveness in the long-run to gauge its proficiency when it comes to boosting savings. Based on such an assessment, taxpayers should decide whether to stick with the old regime or to opt for the new one.