The Finance Minister has proposed reduced tax rates in respect of an individual and HUF who opts to not to claim any exemption or deduction by introducing a new Section 115BAC. The budget 2020 has given taxpayers the option to choose between the existing income tax regime (which allows availing existing income tax exemptions and deductions) and a new tax regime with slashed income tax rates and new income tax slabs but no tax exemptions and deductions. The new tax regime offers lower tax rates and new tax slabs and simultaneously removes tax exemptions/deductions and will result in lower tax outgo for taxpayers, according to the finance minister.
As per the proposal, the tax rate applicable, shall be as under, if an individual and HUF exercises an option to not to claim various exemptions or deductions provided otherwise under the Act:-
| Sr.No | Total Income | Rate of Tax (%) |
| 1. | Upto Rs.2,50,000 | NIL |
| 2. | From Rs.2,50,001 to Rs.5,00,000 | 5 |
| 3. | From Rs.5,00,001 to Rs.7,50,000 | 10 |
| 4. | From Rs.7,50,001 to Rs.10,00,000 | 15 |
| 5. | From Rs.10,00,001 to Rs.12,50,000 | 20 |
| 6. | From Rs.12,50,001 to Rs.15,00,000 | 25 |
| 7. | Above Rs.15,00,000 | 30 |
On going through the above, it is to be noted that following deductions/benefits shall not be available in case if Individual adopts for new tax structure:-
1. Deduction available to salaried employees such as the standard deduction of Rs. 50,000, Leave travel allowance under section 10(5), House rent allowance under section 10(13A).
2. All the deductions under Chapter VI-A other than deduction under section 80JJAA will not be eligible which means deduction of Rs.1,50,000/- in respect of long term savings like life insurance scheme, contribution to PF, PPF and NPS, NSC, long term fixed deposits etc. shall not be available in case the individual opts to pay tax at new rates. Deduction on account of donation under section 80G, deduction on account of interest on loan taken for higher education under section 80E, deduction on account of interest on saving bank account of Rs. 10,000/- under Section 80TTA shall also not be available.
3. Deduction of interest up to Rs. 2,00,000 on Home loan under section 24(b) in respect of self-occupied house, deduction under section 80EEA of interest on home loan.
Comparative analysis of alternate tax with regular tax rates
| Income | Tax liability as per old structure | Tax liability as per new rates | Tax Savings under new option |
| 500000 | 12500 | 12500 | – |
| 750000 | 62500 | 37500 | 26000 |
| 1,000,000 | 112500 | 75000 | 39000 |
| 1,250,000 | 187500 | 125000 | 65000 |
| 1,500,000 | 262500 | 187500 | 78000 |
However, considering the fact that all exemptions and deductions shall not be available, it may not be advisable to exercise such option particularly in the case of salaried taxpayers as the benefit of the exemption/deduction foregone will be far higher as compared to the reduced tax rates. The below table depicts the impact of such new provision in respect of individuals or HUF’s having different level of income who are claiming deduction of Rs.50,000, Rs.1,00,000, Rs. 1,50,000, Rs. 2,00,000, Rs. 2,50,000,Rs. 3,00,000 and Rs.350000
A) Cases where deductions and exemptions are being availed upto Rs.50,000/-
| Total Income of the Assessee before availing deductions/exemptions | Tax liability as per the old structure (after taking benefit of deductions and exemptions) | Tax liability under new structure (without benefit of deductions and exemptions) | Savings under the new regime |
| 500000 | – | – | – |
| 600000 | 23400 | 23400 | – |
| 10,00,000 | 106600 | 78000 | 28600 |
| 13,00,000 | 195000 | 143000 | 52000 |
| 17,00,000 | 319800 | 257400 | 62400 |
| 20,00,000 | 413400 | 3,15,000 | 98400 |
B) Cases where deductions and exemptions are being availed upto Rs.1,00,000/-
| Total Income of the Assessee before availing deductions/exemptions | Tax liability as per the old structure (after taking benefit of deductions and exemptions) | Tax liability under new structure (without benefit of deductions and exemptions) | Savings under the new regime |
| 500000 | – | – | – |
| 600000 | – | 23400 | -23400 |
| 10,00,000 | 96200 | 78000 | 18200 |
| 13,00,000 | 179400 | 143000 | 36400 |
| 17,00,000 | 304200 | 257400 | 46800 |
| 20,00,000 | 397800 | 351000 | 46800 |
C) Cases where deductions and exemptions are being availed upto Rs.1,50,000/-
| Total Income of the Assessee before availing deductions/exemptions | Tax liability as per the old structure (after taking benefit of deductions and exemptions) | Tax liability under new structure (without benefit of deductions and exemptions) | Savings under the new regime |
| 500000 | – | – | – |
| 600000 | – | 23400 | -23400 |
| 10,00,000 | 85800 | 78000 | 7800 |
| 13,00,000 | 163800 | 143000 | 20800 |
| 17,00,000 | 288600 | 257400 | 31200 |
| 20,00,000 | 382200 | 351000 | 31200 |
D) Cases where deductions and exemptions are being availed upto Rs.2,00,000/-
| Total Income of the Assessee before availing deductions/exemptions | Tax liability as per the old structure (after taking benefit of deductions and exemptions) | Tax liability under new structure (without benefit of deductions and exemptions) | Savings under the new regime |
| 500000 | – | – | – |
| 600000 | – | 23400 | -23400 |
| 10,00,000 | 75400 | 78000 | -2600 |
| 13,00,000 | 148200 | 143000 | 5200 |
| 17,00,000 | 273000 | 257400 | 15600 |
| 20,00,000 | 366600 | 351000 | 15600 |
E) Cases where deductions/ exemptions are being availed upto Rs.2,50,000/–
| Total Income of the Assessee before availing deductions/exemptions | Tax liability as per the old structure (after taking benefit of deductions and exemptions) | Tax liability under new structure (without benefit of deductions and exemptions) | Savings under the new regime |
| 500000 | – | – | – |
| 600000 | – | 23400 | -23400 |
| 10,00,000 | 65000 | 78000 | -13000 |
| 13,00,000 | 132600 | 143000 | -10400 |
| 17,00,000 | 257400 | 257400 | NIL |
| 20,00,000 | 351000 | 351000 | NIL |
F) Cases where deductions and exemptions are being availed upto Rs.3,00,000/-
| Total Income of the Assessee before availing deductions/exemptions | Tax liability as per the old structure (after taking benefit of deductions and exemptions) | Tax liability under new structure (without benefit of deductions and exemptions) | Savings under the new regime |
| 500000 | – | – | – |
| 600000 | – | 23400 | -23400 |
| 10,00,000 | 54600 | 78000 | -23400 |
| 13,00,000 | 117000 | 143000 | -26000 |
| 17,00,000 | 241800 | 257400 | -15600 |
| 20,00,000 | 335400 | 351000 | -15600 |
G) Cases where deductions and exemptions are being availed upto Rs.3,50,000/-
| Total Income of the Assessee before availing deductions/exemptions | Tax liability as per the old structure (after taking benefit of deductions and exemptions) | Tax liability under new structure (without benefit of deductions and exemptions) | Savings under the new regime |
| 500000 | – | – | – |
| 600000 | – | 23400 | -23400 |
| 10,00,000 | 44,200 | 78000 | -33800 |
| 13,00,000 | 1,06,600 | 143000 | -36400 |
| 17,00,000 | 226200 | 257400 | -31200 |
| 20,00,000 | 319800 | 351000 | -31200 |
The moot question is whether removal of such exemptions and deductions and consequent lowering the tax rates will have an impact on the taxpayer. The taxpayer look forward to the ultimate tax liability and in case even after reduction of the tax rates, the ultimate tax liability consequent to the withdrawal of exemptions/deductions goes up, then the same will not be acceptable to the taxpayer. As analyzed hereinabove, it is apparent that the new alternative tax rate and consequent withdrawal of exemption and deduction may not reduce the net tax liability of a large number of taxpayers. Thus, large number of taxpayers may prefer to continue to be governed by the existing slab rates as against opting to pay tax under this new tax slabs.
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