Budget 2020

New tax regime: Lower tax rates sans most tax breaks

Anand Kalyanaraman | Updated on February 02, 2020 Published on February 01, 2020

Should you shift from the old tax regime to the new one? The numbers have to be crunched on a case-to-case basis

BL Research Bureau

Choices can sometimes complicate matters. That’s what seems to have happened with the Finance Minister delivering a googly in the Budget. We now have the choice of continuing with the existing tax regime (with existing income slabs, tax rates and benefits of deductions and exemptions) or moving to the new tax regime (with new income slabs, lower tax rates but without the benefit of most deductions and exemptions).

The choice is not straightforward, and some number crunching with cost-benefit analysis will be needed before deciding whether to continue with the existing regime or move to the new one.

You can continue with the old regime for now, and then move to the new one in future years. If you have no business income, you can make the choice between the old regime and the new regime every year. But if you have business income, once you have made the choice to shift to the new regime, you will have to continue with it in future years too.

7 slabs against 4 earlier

Under the old regime, there were essentially four income slabs and basic tax rates — zero tax on taxable income up to ₹2.5 lakh, 5 per cent tax on income between ₹2.5 lakh and ₹5 lakh, 20 per cent tax on income between ₹5 lakh and ₹10 lakh, and 30 per cent tax on income above ₹10 lakh.

 

 

Under the new tax regime, there will be seven income slabs and basic tax rates — zero tax on taxable income up to ₹2.5 lakh, 5 per cent tax on income between ₹2.5 lakh and ₹5 lakh, 10 per cent tax on income between ₹5 lakh and ₹7.5 lakh, 15 per cent tax on income between ₹7.5 lakh and ₹10 lakh, 20 per cent tax on income between ₹10 lakh and ₹12.5 lakh, 25 per cent tax on income between ₹12.5 lakh and ₹15 lakh, and 30 per cent tax on income above ₹15 lakh.

To be eligible for the new regime that has lower tax rates, you will have to forgo the benefits of most deductions, including Sec 80C (annual investment, expenses, life insurance premium up to ₹1.5 lakh), Section 80D (health insurance premiums), Section 24 (interest on home loans), Section 80CCD (including extra NPS contribution up to ₹50,000 a year), Section 80E (education loan interest) and Section 16 (standard deduction on salary income). Also, you will have to forgo the benefits of most exemptions under Section 10, such as house rent allowance and leave travel concession.

In the new regime, only a handful of deductions and exemptions are allowed. These include employer contribution on account of employee in NPS, transport allowance to divyang (specially abled) employees, and conveyance allowance to meet office duty expenses.

In short, it is now a choice between higher tax rates with the benefits of most deductions and exemptions, and lower tax rates with almost no deductions and exemptions. As the Finance Minister mentioned, for a person with annual income of ₹15 lakh and not availing any deductions, etc, the tax under the new regime is ₹1,95,000 while it will be ₹2,73,000 in the old regime — that is, the tax will be lower by ₹78,000 under the new tax regime.

While this is true, the case could be different if the person is taking the benefit of several tax breaks, for instance Section 80C (₹1.5 lakh), Section 80D (₹25,000), Section 24 (₹2 lakh). In this case, the taxable income of the person under the old regime will come down to ₹11.25 lakh (₹15 lakh less the deductions) and the tax liability will be ₹1,56,000. But under the new regime, the taxable income of the person will remain ₹15 lakh and the tax liability will be ₹1,95,000 — that is, it will be better continuing under the old regime since the tax will be lower by ₹39,000. So, it will be important to take into consideration the tax deductions and exemptions that you are using, and their impact on the final tax liability before deciding whether to opt for the new regime or stay with the old one.

The Finance Minister mentioned that currently, it is almost impossible for a taxpayer to comply with the income-tax law without taking help from professionals, and that measures are being taken to prefill the income tax return for individuals who opt for the new regime, so that they would need no assistance from an expert to file the return and pay income tax. But the worry is that given the complications involved, the taxpayer might still need the advice of a tax expert to determine whether he should stick with the old regime or shift to the new one.

 

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Published on February 01, 2020
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