Hello Everyone, on 1st February, 2020 our Finance and Corporate Affairs Minister Smt. Nirmala Sitharaman has brought out long but deep thoughtful budget with lot of actionable commitments.

On the plate of Direct Tax Proposals there are around 50 amendments brought in by the Finance Bill, 2020.

Changes in Personal Income Tax Slabs being most talkative point among the assessees apart from other changes like scrapping of Dividend Distribution Tax, Rationalisation of provisions for Start-Ups, Fast Track Mode brought out for disposal of long pending Income Tax cases at various forum, Extension of faceless assessment to faceless appeals on expectation of good governance, Insertion of Tax Charter in the Statute and many more.

In this Article, we attempted to bring out changes in Personal Income Tax Slabs with an Interesting Conversation between Mr. Old and Mr. New which takes fiction character of Old Provision and New proposed Provisions of Income Tax Act,1961 respectively.

Here conversation starts…

Mr. Old: Hi, Mr. New, welcome to our country’s Tax System!!

Mr. New: Thanks buddy! Mr. Old, and by the way I think you have to leave this system, if I am correct?

Mr. Old: HaHaHa…!

Mr. New: Why are you laughing?

Mr. Old: Are you not aware, our Finance Minister is so kind enough in keeping me exist in this Tax System instead of scrapping me on bringing you

Mr. New: Oh is it!!, how we both will survive together in the system? Does our users (Assessees) will not get confused on whom to select?

Mr. Old: Yes, that’s true but our users has got option in selecting either of us by doing their benefit analysis.

Mr. New: Oh is that the case, then its time to pack your bag…!

Mr. Old: Why??

Mr. New: Because I came in this system with the name of Simplification & lower tax slabs, so its natural they will select me only so your role in system will be minimised

Mr. Old:  Yes, what you saying is correct. You are simple but does the selection between us for the users are that simple??

Mr. New: Why you are saying like this?

Mr. Old: Yes, because I know the users very good enough as I am very old player in this system of Tax as compared to you. They will plan as much possible to save the tax amount.

Mr. New: Hmm…so am I not good?

Mr. Old: Wait…! I am not saying like that, we may be good or bad for users, as it depends after their analysis. Let us analyse ourselves and be kind enough in saying our users (Assessees) to follow the law of land in letter and spirit.

Mr. New: Yes, let us study our differences in more detailed way. So here we are –

Under the proposed tax regime Individuals and HUF will be given two options to opt for taxation, one is current scheme with no changes and other by way of option Section 115 BAC:

Option 1: Current Scheme:

Individuals having less than 60 years age and HUF Individuals having age more than 60 years but less than 80 years age Individuals having age more than 80 years
Total Income Tax Total Income Tax Total Income Tax
Upto Rs. 2,50,000 Nil Upto Rs.3,00,000 Nil Upto Rs. 5,00,000 Nil
Rs. 2,50,001 to Rs. 5,00,000 5% Rs. 3,00,001 to Rs. 5,00,000 5% Rs. 5,00,001 to Rs. 10,00,000 20%
Rs. 5,00,001 to Rs. 10,00,000 20% Rs. 5,00,001 to Rs. 10,00,000 20% Above Rs 10,00,000 30%
Above Rs 10,00,000 30% Above Rs 10,00,000 30%

 Note 1: If NET TAXABLE INCOME i.e. after reducing all deductions (Section 80C, 80D etc) and set off of losses (Interest on House Property) remains below 5 Lakhs then under the provisions of Section 87A a rebate of amount equals to income tax or Rs.12,500/- whichever is lower offered to tax payer as relief which results in Nil Tax. But if NET TAXABLE INCOME after reducing all eligible deduction falls beyond 5 Lakhs, suppose Rs,5,00,001/- then will not get any benefit of this rebate and would be liable to pay tax as per the above slab.

Note-2: There are no changes in present Tax provisions for Individual and HUF except with the additional option of opting Concessional Tax Rate scheme discussed hereinafter.

Option 2: Proposed Concessional Income Tax Rate Scheme (Optional):

Total Income Tax
Upto Rs 2,50,000 Nil
From Rs 2,50,001 to Rs 5,00,000 5%
From Rs 5,00,001 to Rs 7,50,000 10%
From Rs 7,50,001 to Rs 10,00,000 15%
From Rs 10,00,001 to Rs 12,50,000 20%
From Rs 12,50,001 to Rs 15,00,000 25%
Above Rs 15,00,000 30%

Note 1: To avail the benefit of concessional rate, following conditions needs to be satisfied.

A. Following exemptions and deductions will not be available:

a. Leave Travel Concessions (Section 10(5))

b. House Rent Allowance (Section 10(13A))

c. Some Allowances mentioned in Section 10(14)

d. Allowances to MPs/MLAs as contained in (Section 10(17))

e. Exemption of INR 1500/- in respect of clubbing of minor child’s income (Section 10(32))

f. Exemption in respect of SEZ units (Section 10AA)

g. Flat deduction of INR 50,000/- which available to salaried employees

h. Deduction of entertainment allowance

i. Deduction of professional tax

j. Deduction of interest on housing loans in case of self-occupied properties. (Section 24(b))

k. Additional depreciation of 20% of Actual Cost of New plant and machinery (Section 32(1)(iia))

l. Additional depreciation of 15% in respect of investment made in notified backward areas (Section 32AD)

m. Rebate in respect of amount deposited in Tea/Coffee/Rubber development A/c or Site Restoration Fund (Section 33AB and Section 33ABA)

n. Deduction in respect of amount paid for the purpose of scientific research as mentioned in section 35(ii).35(iia) and 35(iii)

o. Deduction in respect of any specified business as mentioned in section 35AD

p. Deduction in respect of Agriculture Extension Activities (Section 35CCC)

q. Deduction in respect of family pension (Section 57(iia))

r. Deduction under section 80C to 80U. However, deduction in respect of employer contribution to employees u/s. 80CCD(2) and deduction in respect of new employees 80JJAA can be availed.

B. No set off of any losscarried forward or depreciation from previous years if it is attributable to Deductions and allowances mentioned under this section. Also, this loss won’t be carried forward in future year.

C. House Property loss (Interest) can be set off with House Property Income (Rent) only NOT by any other head such as Salary, business etc.

D. File Income Tax Return on or before due date.

E. Any other deduction or exemption provided under any other law is also not allowed.

F. In case a unit is located in IFSC, benefit of this section is available only it it complies with the condition mentioned in section 80LA in addition to conditions mentioned above.

G. If after exercising the option, any of the condition is violated then benefit of this section is not available for that year and any of the subsequent year and income will be taxed as per existing slab rate.

H. It is noteworthy that this option once exercised, it cannot be withdrawn subsequently in any of the following year in case where the Individual or the HUF has business Income.

Note 2: Section started with the wording that “Notwithstanding anything contained in this Act…” which means provisions of this section supersede all the other provisions of the Act. One may conclude that rebate u/s 87A of Rs.12,500 for person having Income less than 5 Lakhs will not be available if any taxpayer opts under this scheme because this section overrides the act.

Note 3: Allowances allowed under this Scheme:

a. Transport Allowance

b. Conveyance Allowance

c. Any Allowance granted to meet the cost of travel on tour or on transfer

d. Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.

However, it is not clarified that to what extent such allowances will be allowed.

Note 4: This scheme can be availed by Salaried Employee or Business person both but they have to file their Income Tax Return on or before due date. However, there is some differentiation in Salaried person and Business Person under this scheme. Salaried person can anytime opt in or opt out of this scheme multiple time, however a person who earns business income if opt out once from this scheme he will not be able to claim this scheme in any of the future year. He can opt in under this scheme in future only when he has no Business Income. Doors for this scheme will be locked for him until his business cease to exist.

Note 5: The said amendment will be applicable from AY 2021-22.

# Example: Comparatives Analysis of say two below Category of Assessees:

Mr. A, whose Gross Annual Income is INR 12,00,000/-

Assumption 1: Has Housing Loan Interest (2lakhs), Section 80C Deductions (1.5 lakhs), Standard Deduction (0.50 lakhs) and Section 80D Deductions (0.25 lakhs) [Old Option with deductions]

Assumption 2: Into Business and assuming not having any such deductions in his bucket. [Old Option without deductions]

Old Option with Deductions Old Option without deductions New Option
Income 12,00,000 12,00,000 12,00,000
Deductions/Exemptions 4,25,000
Taxable Income 7,75,000 12,00,000 12,00,000
Tax 67,500 1,72,500 1,15,000
Cess @ 4% 2,700 6,900 4,600
Total Tax 70,200 179,400 119,600

Mr. B, whose Gross Annual Income is INR 12,00,000/-

Assumption 1: Has Section 80C Deductions (1 lakhs), Standard Deduction (0.50 lakhs) [Old Option with deductions]

Assumption 2: Into Business and assuming not having any such deductions in his bucket. [Old Option without deductions] 

Old Option with Deductions Old Option without deductions New Option
Income 12,00,000 12,00,000 12,00,000
Deductions/Exemptions 1,50,000
Taxable Income 10,50,000 12,00,000 12,00,000
Tax 1,27,500 1,72,500 1,15,000
Cess @ 4% 5100 6,900 4,600
Total Tax 132,600 179,400 119,600

On preliminary overview of certain calculations, it seems more beneficial to Business person as compared to Salaried Person because there are various deductions and allowances taken away from salaried person to opt in for this scheme as compared to the business person.

Conversation continues……

Mr. Old: So, we have seen the differences between both of us, and I believe this will help our users in selecting either of us for their Tax Computation of A.Y. 2021-22

Mr. New: Hey.. yes that was great! Also, one thing I could notice, possibly with so many deductions and exemptions available from last so many decades, there would have been lot of litigations/matters would have arisen in scrutiny for allowable / non allowable etc.

Mr. Old: Yes, you are correct. Even assessee would have taken undue advantage if cases were not taken up in scrutiny. But, its matter of trust our Department given to Assesses, so many changes took place over the period of time like from document submission at one point of time to paper less returns etc.

Mr. New: Hmm…

Mr. Old: One more thing I would like to highlight here..

Mr. New: What?

Mr. Old: On selecting me till now, genuine Assessess are bound to save and Invest their money for the purpose of Tax Saving and even many of my users have bought House by taking Housing Loan so they can get deductions while computing Taxable Income. But I doubt, whether my users will continue to invest their money if they opt you i.e. New Tax Slabs.

Mr. New: Its correct to some extent, but don’t forget what our beloved Prime Minister Shri Narendra Modi has said “Wealth Creation leads to Wealth Distribution” So wealth creator needs to be respected. So, I am confident enough with the intent of legislature that possibly with more money left in hand of assessees, they now will do savings and wisely select their investment plans as per their choice instead of forcibly only for the purpose of Tax Saving.

Thereby, both Mr. Old and Mr. New shook their hands and are ready to welcome their respective users (Assessees) with effect from A.Y. 2021-22.

Disclaimer: The Contents of the document are solely for information purpose. It does not constitute professional advice or a formal recommendation. Due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Comments on misinterpretation and mistakes are wholeheartedly invited.

Author – CA Chelladurai M., a practicing Chartered Accountant from Thane, Mumbai and can be reached at Email : [email protected] and Phone : 9892697493

CA Chelladurai M., has more than 8 years of professional experience in taxation, auditing, accounting and consulting profession.

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January 2021