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How to calculate income tax liability under new tax regime for FY 2021-22

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Effective from FY 2020-21, an individual has the option to continue with the existing/old income tax regime and avail existing tax deductions and exemptions, or choose the new tax regime and forgo 70 tax deductions and exemptions such as sections 80C, 80D, tax exemption on HRA, LTA etc.

Further, individuals who do not have business incomes (i.e., salaried individuals) will be required to choose between the two tax regimes every financial year. Individuals having business income, too, can opt for the new tax regime. However, once opted, they can switch to the old tax regime only once in their lifetime.

Thus, if you are planning to opt for the new tax regime in the current FY 2021-22, then it is important to know the income tax slabs and rates in the new tax regime and how to calculate your income tax liability.

Income tax slabs and rates under the new tax regime for individuals in FY 2021-22

S. No. Income slabs Income tax rate (%)
1 Up to Rs 2.5 lakh Nil
2 Between Rs 2,50,001 and Rs 5 lakh 5
3 Between Rs 5,00,001 and Rs 7.5 lakh 10
4 Between Rs 7,50,001 and Rs 10 lakh 15
5 Between Rs 10,00,001 and Rs 12.5 lakh 20
6 Between Rs 12,50,001and Rs 15 lakh 25
7 Above Rs 15 lakh 30

* Surcharge is levied on incomes above Rs 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 up to Rs 5 lakh will be eligible for tax rebate under section 87A up to Rs 12,500, thereby making zero tax payable in the new tax regime.

Do note that an individual opting for the new tax regime is eligible to claim deduction under section 80CCD (2) of the Income-tax Act, 1961. This is the deduction available on the employer’s contribution to the Tier-I NPS account of an employee. An individual can claim maximum deduction of 10% of employee’s salary (salary here means basic plus dearness allowance).

How to calculate income tax in new tax regime
It is important to know how to calculate one’s income tax liability under the new tax regime. Here is an example to help you understand how to calculate your income tax liability under new tax regime.

Suppose your gross taxable income in FY 2021-22 is Rs 17 lakh. Further, assuming during the year your employer has deposited Rs 70,000 to your Tier-I NPS account. You can avail deduction for that under section 80CCD (2).

As you are eligible to claim deduction for this under the new tax regime, your net taxable income will be Rs 16.30 lakh (Rs 17 lakh minus Rs 70,000). You are required to calculate income tax liability on Rs 16.30 lakh for FY 2021-22 under 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 net taxable income of Rs 16.30 lakh, the first Rs 2.5 lakh will be tax-exempt. This is because no tax is payable as mentioned in point 1 in the table above. The income left on which tax is to be calculated is Rs 13.80 lakh (Rs 16.30 lakh minus Rs 2.5 lakh).

From point 2 in the slab table, the next Rs 2.5 lakh (Rs 5 lakh minus the exempt Rs 2.5 lakh) from Rs 13.80 lakh will be taxed at 5%. The tax amount here will be Rs 12,500 (5% of Rs 2,50,000).

Now the income on which tax liability is to be calculated is Rs 11.30 lakh. Out of this, the next Rs 2.5 lakh (Rs 7.5 lakh minus Rs 5 lakh) will be taxed at 10% as mentioned in point 3. The tax amount comes out to be Rs 25,000 (10% of 2,50,000).

Till this point, your tax liability is Rs 37,500 (0+12,500+25,000) till the point 1,2 and 3 from the table above. Note that not all the income has been offered to tax. The income on which tax has to be calculated is Rs 8.8 lakh.

From Rs 8.8 lakh, Rs 2.5 lakh will be deducted (Rs 10 lakh minus Rs 7.5 lakh) and tax will be calculated at 15% from point 4 in the table above. Your tax liability will be Rs 37,500. At this point, income left for 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 next Rs 2.5 lakh (Rs 12.5 lakh minus Rs 10 lakh) will be taxed at 20% as mentioned in point 5 at the table above. The tax liability will be Rs 50,000 (20% of Rs 2,50,000). Now the income left for chargeable for tax is Rs 3,80,000.

From point 6, the next Rs 2.5 lakh (Rs 15 lakh minus Rs 12.5 lakh) will 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.

This leftover income will be taxed at 30% from point 7 mentioned in the table. The tax liability will be Rs 39,000.

Once every rupee is offered to tax, the total tax liability comes 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. The cess amount is Rs 9,060.

Thus, the total tax liability under the new tax regime is Rs 2,35,560.

For individuals, it is important that compare this tax liability under the old tax regime after claiming applicable tax deductions and exemptions.

Also Read: How to calculate income tax regime under old tax regime

Use ET Wealth’s income tax calculator to compare and find out which tax regime you should opt for in FY 2021-22.

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