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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Company: Suyash Tripathi & Co. Chartered Accountants
Location: MUMBAI, Maharashtra, IN
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