With effect from date FY 2020-21, a person has the choice to carry on with the existing income tax regime and claim the existing tax deductions and exemptions, or opt for the new tax regime and let go of 70 tax deductions and exemptions like sections 80C, 80D, tax exemption on HRA, LTA, and others.
Moreover, individuals who do not poses business incomes that are the salaried person would be needed to choose between the two tax regimes every fiscal year. A person who has the income from the business would choose for the new tax regime. But once it is chosen then they can switch to the old tax regime only once in their life.
Hence when you are planning to choose for the new tax regime in the present FY 2021-22, then it is essential to find out the income tax slabs and the rates in the new tax regime and the method to compute your income tax liability.
Income Tax Slabs & Rates for Individuals Under New Tax Regime
| Income slabs | Income tax rate (%) |
|---|---|
| Up to Rs 2.5 lakh | Nil |
| Between Rs 2,50,001 and Rs 5 lakh | 5 |
| Between Rs 5,00,001 and Rs 7.5 lakh | 10 |
| Between Rs 7,50,001 and Rs 10 lakh | 15 |
| Between Rs 10,00,001 and Rs 12.5 lakh | 20 |
| Between Rs 12,50,001and Rs 15 lakh | 25 |
| Above Rs 15 lakh | 30 |
You must remember that the person choosing for the new tax regime is eligible to avail of the deduction beneath section 80CCD (2) of the income tax act 1961. The same is the deduction available on the employer’s contribution to the Tier-I NPS account of the employee. A person can avail the highest deduction of 10% of employees salary, here salary pointed to the basic and the dearness allowance.
What is the Method to Calculate Income Tax Liability Under New Tax Regime
It is essential to find out the method to compute one’s income tax liability beneath the new tax regime. Below is an example to assist you to compute your income tax liability beneath the new tax regime.
Let us say your gross taxable income in the FY 2020-22 is Rs 17 lakh. Moreover, suppose in the year your employer has deposited Rs 70,000 to your Tier-I NPS account. You could claim the deduction for that beneath section 80CCD(2).
Since you qualified to claim the deduction for the same beneath the new tax regime, your net taxable income would be Rs 16.30 lakh (Rs 17 lakh minus Rs 70,000). You are needed to compute the income tax liability on Rs 16.30 lakh for FY 2021-22 beneath the new tax regime.
| Particulars | Amount (In Rs) |
|---|---|
| Gross Taxable Salary | 17,00,000 |
| Deduction Under Section 80CCD (2) | 70,000 |
| Net Taxable Salary | 16,30,000 |
From the net taxable income of Rs 16.30 lakh, the first Rs 2.5 lakh will be tax-exempt. The same is due to no tax being subjected to pay as mentioned in point 1 in the table above. The income left on which tax is to be computed is Rs 13.80 lakh (Rs 16.30 lakh minus Rs 2.5 lakh).
From point 2 in the slab table, the subsequent Rs 2.5 lakh minus the exempt Rs 2.5 lakh from Rs 13.80 lakh would be taxed at a rate of 5%. The tax amount in this would be Rs 12,500 (5% of Rs 2,50,000).
But the income on which the tax liability is to be computed is Rs 11.30 lakh. Out of this, the subsequent Rs 2.5 lakh (Rs 7.5 lakh minus Rs 5 lakh) would be taxed at 10% as prescribed in point 3. The tax amount would be Rs 25000 (10% of 2,50,000).
Read Also: Easy Way to Switch New to Old Income Tax Scheme for Taxpayers
From Rs 8.8 lakh, Rs 2.5 lakh would be deducted Rs 10 lakh minus Rs 7.5 lakh) and the tax would be computed on 15% from point 4 in the mentioned table. Rs 37,500 will be your tax liability. On this point, the income retained for the taxation is Rs 6,30,000.
| Income Tax Slabs | Tax Liability (Rs) |
|---|---|
| 0 – Rs 2.5 lakhs @ NIL | 0 |
| Rs 2.5 – Rs 5 lakh @ 5% | 12,500 |
| Rs 5 – Rs 7.5 lakh @10% | 25,000 |
| Rs 7.5 – Rs 10 lakh @15% | 37,500 |
| Rs 10 – Rs 12.5 lakh @20% | 50,000 |
| Rs 12.5 – Rs 15 lakh @25% | 62,500 |
| Above Rs 15 lakh @30% | 39,000 |
| Total tax liablity without cess @4% | 2,26,500 |
| Adding cess at 4% | 9,060 |
| Total tax liability | 2,35,560 |
The subsequent Rs 2.5 lakh (Rs 12.5 minus Rs 10 lakh) would be taxed at 20% as provided in point 5 in the above table. The tax liability would be Rs 50,000 (20% of Rs 2,50,000). Now the income retained towards the chargeable for the tax is Rs 3,80,000.
From point 6, the next Rs 2.5 lakh (Rs 15 lakh minus Rs 12.5 lakh) shall be taxed at Rs 25%. The tax amount will be Rs 62,500 (25% of Rs 2,50,000). After this, the income that is still left chargeable is Rs 1,30,000.
The same left income would be taxed at 30% through point 7 given in the table. Rs 39000 would be the tax liability.
Once every rupee is proposed to tax, the total tax liability revealed out to be Rs 2,26,500 (0+12,500+25,000+37,500+50,000+62,500+39,000. Now, health and education cess at 4% will be added to this. Rs 9,060 is the cess amount.
Hence, the total tax liability beneath the new tax regime is Rs 2,35,560.
For individuals, it is essential to differentiate the same income tax liability beneath the old tax regime post to avail the applicable tax deductions and exemptions.
