The claim that taxpayers will save tax under the new regime raises questions.
Finance Minister Nirmala Sitharaman said in her budget speech that a taxpayer earning Rs 15 lakh will save Rs 78,000 in tax under the new regime.
The Budget 2020 has made the tax structure more complicated by adding three income tax slabs. The removal of tax exemptions and deductions certainly makes compliance less tedious, but avid tax planners who maximised their tax deductions will probably pay more tax under the new tax regime. The budget 2020 has tried to put more money in the hands of taxpayers by curtailing the incentives to save.
Even the claim that taxpayers will save tax under the new regime raises questions. Finance Minister Nirmala Sitharaman said in her budget 2020 speech that a taxpayer earning Rs 15 lakh will save Rs 78,000 in tax under the new regime. “A person earning Rs 15 lakh in a year and not availing any deductions and exemptions will pay only Rs 1.95 lakh tax as compared to Rs 2.73 lakh in the old regime,” said the Finance Minister.
New income tax slabs and rates No change in tax exemption given to incomes up to Rs 5 lakh in interim.
But this is without any deductions under various sections of Chapter VI-A. If the taxpayer claims deductions for Rs 2.5 lakh (Rs 50,000 standard deduction, Rs 1.5 lakh under 80C and Rs 50,000 contribution to NPS), his tax will not change. If he also claims house rent allowance (HRA) exemption or home loan interest deduction of Rs 2 lakh, his tax in the old regime would be lower by Rs 46,800 (see graphics).
Salaried taxpayers who opt for the new regime will have to forgo the standard deduction as well as the exemptions under chapter VI-A, including the HRA, investments under Section 80C, medical insurance premium and even the leave travel allowance which is tax free if claimed once in a block of two years.
What’s out Some of the 70 exemptions and deductions you won’t get in new regime.
Section 80C investments
House rent allowance
Housing loan interest
Leave travel allowance
Medical insurance premium
Standard deduction
Savings bank interest
Education loan interest
What stays Some 50 tax exemptions have been left untouched. These include.
Standard deduction on rent
Agricultural income
Income from life insurance
Retrenchment compensation
VRS proceeds
Leave encashment on retirement
To be fair, taxpayers will have the option to switch to the new tax structure. “This is a good move because taxpayers will be able to make the choice depending on their financial situation,” says Sudhir Kaushik, co-founder of Taxspanner. “Taxpayers who avail several exemptions and deductions such as house rent allowance and 80C deductions may not benefit from switching to the new system,” says Amit Maheshwari, India Tax Leader at Ashok Maheshwary & Associates.
The budget has, however, left the surcharge on tax untouched. Taxpayers with income between Rs 50 lakh and Rs 1 crore will continue to pay 10% surcharge on the tax. The surcharge is 15% for income between Rs 1 crore and Rs 2 crore, 25% for between Rs 2 crore and Rs 5 crore and 37% for income over RS 5 crore. So taxpayers earning just below these threshold limits will not benefit if they forego the exemptions and move to the new tax regime.
Impact on taxpayers Here’s how the new tax regime will affect the tax outgo of taxpayers at different income levels.
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Income: Rs 15 lakh * Deductions assumed: Rs 1.5 lakh under Sec 80C; Rs 50,000 standard deduction
Income: Rs 30 lakh * Deductions for Rs 30 lakh, Rs 60 lakh, Rs 1.2 crore: Rs 1.5 lakh under Sec 80C; Rs 50,000 standard deduction; Rs 25,000 under Sec 80D; Rs 2 lakh home loan interest under Sec 24.
Income: Rs 60 lakh Surcharge @10%
Income: Rs 1.2 crore Surcharge @15%
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How the new income tax regime will impact taxpayers under different incomes
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In Union Budget 2020, Nirmala Sitharaman introduced a "simplified", optional regime with three new tax slabs. However, taxpayers can continue with the existing structure if that suits them more. Although the doing away of exemptions and deductions simplifies compliance, taxpayers who exploited deductions to the fullest may pay more tax under the new regime. The budget has tried to put more money in the hands of taxpayers by curtailing the incentives to save.
The tax exemption given to incomes up to Rs 5 lakh remains unchanged. Salaried taxpayers who opt for the new regime will have to forgo standard deduction as well as exemptions under chapter VI-A, including HRA, investments under Section 80C, medical insurance premium and even leave travel allowance which is tax free, if claimed once in a block of two years.
In Union Budget 2020, Nirmala Sitharaman introduced a "simplified", optional regime with three new tax slabs. However, taxpayers can continue with the existing structure if that suits them more. Alth..
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What’s out: Here are a few of the 70 exemptions and deductions you won’t see in the new regime- Section 80C investments, house rent allowance, home loan interest, leave travel allowance, medical insurance premium, standard deduction, savings account interest, education loan interest.
What stays: Around 50 tax exemptions remain untouched, including- standard deduction on rent, agricultural income, income from life insurance, retrenchment compensation, VRS proceeds, leave encashment on retirement.
Surcharges on tax remain untouched. Taxpayers with income between Rs 50 lakh and Rs 1 crore continue to pay 10% surcharge, between Rs 1 crore and Rs 2 crore pay 15%, between Rs 2 crore and Rs 5 crore pay 25% and those with income over Rs 5 crore pay 37%. So those earning just below these limits will not benefit if they forego the exemptions and move to the new regime. Given below is the math to explain how the new regime will affect tax outgo of taxpayers at different income levels.
What’s out: Here are a few of the 70 exemptions and deductions you won’t see in the new regime- Section 80C investments, house rent allowance, home loan interest, leave travel allowance, medical insu..
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From the calculations above, we see that it makes sense for this taxpayer to shift to the new regime with reduced income tax rates. With or without deductions, he/she would continue to pay more under the existing regime. The new regime helps him/her cut his tax outgo.
From the calculations above, we see that it makes sense for this taxpayer to shift to the new regime with reduced income tax rates. With or without deductions, he/she would continue to pay more under..
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Here, the existing tax regime with deductions is the one that minimises the tax outgo. The taxpayer will not benefit if he/she makes the switch to the new regime.
Here, the existing tax regime with deductions is the one that minimises the tax outgo. The taxpayer will not benefit if he/she makes the switch to the new regime.
For a salaried taxpayer with an annual income of Rs 60 lakh, again the current, existing regime with deductions is more tax efficient. Under the new regime, the tax outgo is more than Rs 60,000 higher.
For a salaried taxpayer with an annual income of Rs 60 lakh, again the current, existing regime with deductions is more tax efficient. Under the new regime, the tax outgo is more than Rs 60,000 highe..
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Here too, the tax outgo is higher under the new regime. If the taxpayer chooses to make the switch, his/her tax out go will be more than Rs 62,000 higher than what he/she would be paying in the existing regime with deductions.
Here too, the tax outgo is higher under the new regime. If the taxpayer chooses to make the switch, his/her tax out go will be more than Rs 62,000 higher than what he/she would be paying in the exist..
