Unlike the announcement of “Taxation laws (Amendment) Ordinance,2019”, the Finance Bill for fiscal year 2020-21 presented on 1st February,2020 brought negative impact on the stock market. At the end of the day, SENSEX fell for over 1000 points. The Union Budget for the year 2020-21 was presented in the milieu of depressed economic case where all the important drivers of growth namely private investments, private consumptions and exports were spluttering.

This year’s budget has specifically focused on the following:

1. Simplification of tax payments by gradually phasing out the exemptions and having a flat rate.

2. Increase in the private consumption power

3. Reduction in tax litigations

Option 1 Total income (After exemptions and standard deduction)   Individual Option 2 Total income (Without exemptions and standard deduction)  Individual
Upto INR 250,000 0% Upto INR 250,000 0%
250,000 to 500,000* 5% 250,000 to 500,000* 5%
500,000 to 750,000 20% 500,000 to 750,000 10%
750,000 to 1,000,000 20% 750,000 to 1,000,000 15%
1,000,000 to 1,250,000 30% 1,000,000 to 1,250,000 20%
1,250,000 to 1,500,000 30% 1,250,000 to 1,500,000 25%
1,500,001 and above 30% 1,500,001 and above 30%

In the proposal, the government has changed the tax rates for Individual/HUF in the following manner:

*Relief under Section 87A-INR 12500, if the total income does not increase 5 Lakhs is intact in both the options. These tax rates would be subject to surcharge and cess.

The Option 2 proposed can be availed by forgoing the 70 tax exemptions that are currently available to the Individual/HUF as the case may be (such as standard deduction, leave travel allowance, house rent allowance, mortgage interest deduction on house property, contribution towards Provident Fund etc.).

The Option shall be optional for every year for the Individual/HUF not having business income. The option once exercised cannot be changed.

The government has tried to give relief to the taxpayers whose incomes are up to INR 15 Lakhs. These concessions are given in an innovative fashion by predicting them on taxpayers giving up their exemptions.

Once these proposals are passed by the Parliament, these changes will become effective from the financial year 2020-21.

A small analysis on the new vs. old regime of taxation has been done below:

Case A: When we are not availing any deduction/exemption under chapter VI A or Section 10.

Case 1: Income under salary: INR 350,000
Option 1 Income under Salary 350,000 Option 2 Income under Salary 350,000
Less: Standard deduction 50,000
Taxable income 300,000 Taxable income 350,000
Income tax computation Income tax computation
Upto INR 250,000 NIL Upto INR 250,000 NIL
250,000 to 300,000 2,500 250,000 to 350,000 5,000
Relief under section 87A 12,500 Relief under section 87A 12,500
Tax payable NIL Tax payable NIL

No change

 –

Case 2: Income under salary: INR 600,000
Option 1 Income under Salary 600,000 Option 2 Income under Salary 600,000
Less: Standard deduction 50,000
Taxable income 550,000 Taxable income 600,000
Income tax computation Income tax computation
Upto INR 250,000 NIL Upto INR 250,000 NIL
250,000 to 500,000 12,500 250,000 to 500,000 12,500
500,000 to 600,000 20,000 500,000 to 600,000 10,000
Relief under section 87A NIL Relief under section 87A NIL
Tax payable 32,500 Tax payable 22,500

10,000 more tax payable in the old Case

Case B: When we are availing deduction/exemption under chapter VI A or Section 10. Analysis in this case has been done on the following assumptions:

  • HRA: 10% of the salary
  • Chapter VI A Exemption: Maximum limit
  • Limit under section 80CCD: Not considered
Case 1: When income is INR 250,000
Option 1 Income under Salary 250,000 Option 2 Income under Salary 250,000
Less: Standard deduction 50,000 Income tax payable NIL
Less: Section 10 deduction 25,000
Less: Chapter VI A Exemption 150,000
Taxable income 25,000
Tax payable NIL

No change

 

Case 2: When income is INR 600,000
Option 1 Income under Salary 600,000 Option 2 Income under Salary 600,000
Less: Standard deduction 50,000 Income tax computation
Less: Section 10 deduction 60,000 Upto INR 250,000  NIL
Less: Chapter VI A Exemption 150,000 250,000 to 500,000 12,500
Taxable income 340,000 500,000 to 600,000 10,000
Income tax computation Relief under section 87A  NIL
Upto INR 250,000  NIL Tax payable 22,500
250,000 to 340,000 4,500
Relief under section 87A 12,500
Tax payable  NIL

22,500 more tax payable in new proposed Case vs NIL in old Case

 –

Case 3: When income is INR 1,600,000
Option 1 Income under Salary   1,600,000 Option 2 Income under Salary     1,600,000
Less: Standard deduction         50,000 Income tax computation
Less: Section 10 deduction      160,000 Upto INR 250,000  NIL
Less: Chapter VI A Exemption      150,000 250,000 to 500,000           12,500
Taxable income   1,240,000 500,000 to 750,000           25,000
Income tax computation 750,000 to 1,000,000           37,500
Upto INR 250,000  NIL 1,000,001 to 1,250,000           50,000
250,000 to 500,000         12,500 1,250,000 to 1,500,000           62,500
500,000 to 1,000,000      100,000 1,500,001 to 1,600,000           30,000
1,000,000 to 1,240,000         72,000 Relief under section 87A  NIL
Relief under section 87A  NIL Tax payable        217,500
Tax payable      184,500

33,000 more tax payable in the new scenario

By bifurcating the analysis in two cases vis-à-vis availment of exemptions/deductions under both the options available, I just wanted to emphasize that the utilization of limit of INR 150,000 available, totally depends on the investment and consumption power of an individual. Some of the individuals might not be able to exhaust the limit of INR 150,000, on the other hand, some of the individuals can claim various expenditures such as tuition fees for their children, interest on house property etc. as a deduction under chapter VI A and the same is a small amount for them to claim as deductions.

Concluding remarks:

A proper analysis by the employees should be made before giving the investment declarations for the Financial Year 2020-21. The same should be in line with the exemptions availed and investments made in 2019-2020.

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7 Comments

  1. Ruhikalra73 says:

    Dear readers,

    A small mistake is apparent from the reading. Standard deduction under section 16 is not to be considered under Option 2

    Apologies for the inconvenience.

  2. pradeep says:

    This is regarding Illustrations depicted tax calculations using both Option1 and Option2. You have considered standard deduction for Option 2 which is wrong. Section 16 deductions are not allowed in the new tax regime. Please revisit your calculations.

  3. SKGUPTA says:

    VERY HELPFUL WRITE UP.PL CLARIFY THR FOLLOWING;
    1.IS THE DEDUCTION OF RS 50000/- UNDER 80TTB AVAILABLE IN THE NEW SCHEME.
    2. IS THE MINIMUM THRESHHOLD OF RS 300000 STILL APPLICABLE.
    BOTH QUESTIONS ARE RELATED TO SENIOR CITIZENS.
    WILL APPRECIATE CLARIFICATION BY EMAIL

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