Union Budget 2020 left Indian Taxpayers in a fuss offering two tax slabs to opt for, with a pinch of a curb in it. Though the new tax regime has slashed the income tax rates, it came out with a backdrop of eliminating tax exemptions.

This article unwinds the features of the new tax structure,compares the new tax scheme v/s the old to provide you with relief from the dilemma. The tax regime to choose to pay the minimum tax will depend upon individuals and is purely based on income and investments made by the taxpayer.

Comparison of the new Income Tax tax Rate slab vs the old Income Tax Rate Slabs-

OLD TAX SLAB NEW TAX SLAB
Income Tax % Income Tax %
< 2,50,000 Nil < 2,50,000 Nil
2,50,001 – 5,00,000 5% 2,50,001 – 5,00,000 5%
5,00,001 – 10,00,000 20% 5,00,001 – 7,50,000 10%
7,50,001 – 10,00,000 15%
> 10,00,000 30% 10,00,001 – 12,50,000 20%
12,50,001 – 15,00,000 25%
>15,00,000 30%

Note: Health and Education Cess is applicable for all the income ranges at 4%.Surcharge stands at 10% for income above 50 Lakhs and 15% for income above one crore.

Individuals whose income is less than five lakhs are eligible for a rebate of Rs.12,500/- under the new tax regime, thereby zero tax paid.

While salaried employees are allowed to switch between the new and the old tax slabs year to year, Business Personnels are directed to permanently fix any one of the tax slabs for the future years. So, the utmost care has to be taken in deciding the tax slab.

Under the new tax system, an individual is only able to claim deductions under Section 80CCD-Deduction towards the contribution of NPS Account by the employer for a maximum limit of 10% of the employee’s salary( basic pay+ dearness allowance). All the other deductions under section 80C,80D,80EE,80TTA, etc., and exemptions such as HRA, LTA, etc., are not to be availed in the new tax slab.

TDS:

While it creates a significant amount of dilemma between taxpayers, it has to be unfolded by them at the beginning of the FY 2020-2021, rather at the end. As per the recent circular from The Central Board of Direct Taxes (CBDT), the employers have to deduct TDS on salary for FY 2020-21 as per the tax slab opted by the employee. The employee has to intimidate the employer in advance, on the tax slab they would like to choose. If it has not been intimidated by the employee, then the employer can follow TDS rates as per the old scheme.

The tax slab for TDS, once opted, cannot be changed throughout the year. However, an employee is allowed to change the tax slab at the time of filing ITR( Income Tax Return).

Note: Certain tax exemptions like exemption on food coupons and Leave Travel Allowance (LTA) cannot be claimed if you opt to change from the new slab to the old one while filing the ITR. However, the employee can be able to claim exemptions such as House Rent Allowance(HRA) and common deductions under section 80C,80D, etc., if the tax slab is changed to old at the time of filing return(ITR).

The deductions of the old tax scheme under various sections are as follows:

Standard deduction – Rs.50,000

Section 80C – Rs,1,50,000(PPF, EPF, Bank FD’s, NSC, LIC premium, tuition fees)

Section 80D – Rs.25,000(Medical insurance premium and Health check-up)

HRA deduction(20%) which varies at various income levels:

A sample calculation for an income of 7,50,000 with standard deduction(Old tax regime)

Income : 7,50,000

Standard deduction: 50,000     (7,50,000- 50,000 = 7,00,000)

No tax for 2,50,000: 7,00,000 – 2,50,000 = 4,50,000

5% for 2,50,000 to 5,00,000: 5% of 2,50,000 = 12,500     ( 4,50,000 – 2,50,000 = 2,00,000)

20% for 5,00,000 to 10,00,000: 20% of 2,00,000 = 40,000

Total tax payable = 12,500 + 40,000 = 52,500

Cess at 4% = 2100

Net tax payable = 54,600

COMPARISION OF THE NEW AND OLD TAX REGIME:

CASE 1:

Deductions claimed are standard deduction, 80C, 80D, and HRA:

Salary per annum Tax Payable in Old Slab Tax Payable in New Slab
7.5 lakhs 39,000
10 lakhs 28,600 78,000
12.5 lakhs 70,200 1,30,000
15 lakhs 1,11,800 1,95,000
20 lakhs 2,34,000 3,51,000

CASE 2:

Deductions claimed are standard deduction,80C and 80D:

Salary per annum Tax Payable in Old Slab Tax Payable in New Slab
7.5 lakhs 18,200 39,000
10 lakhs 70,200 78,000
12.5 lakhs 1,24,800 1,30,000
15 lakhs 2,02,800 1,95,000
20 lakhs 3,58,800 3,51,000

CASE 3:

Deduction claimed is the standard deduction alone:

Salary per annum Tax Payable in Old Slab Tax Payable in New Slab
7.5 lakhs 54,600 39,000
10 lakhs 1,06,600 78,000
12.5 lakhs 1,79,400 1,30,000
15 lakhs 2,57,400 1,95,000
20 lakhs 4,13,400 3,51,000

Conclusion:

The new tax slab is useful for individuals claiming standard deduction alone.It will take more money from your pocket if you are requesting more deductions other than the standard deduction of Rs.50,000.

(Disclaimer: Every individual scenario may differ, Please calculate tax and act accordingly)

Points to be remembered:

  • Tax rates have been reduced in the new tax slab, but exemptions and deductions cannot be made.
  • Employees have to intimidate the employers on the tax slab; they opt for TDS purpose.
  • The tax slab can be changed while filing ITR.
  • If an individual receives business income, the tax slab cannot be changed year on year.

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2 Comments

  1. SBK says:

    WHETHER PROFESSION TAX PAID BY EMPLOYEE VIZ. Rs. 2500/- PA CAN CLAIM INCOME TAX EXEMPTION UNDER NEW TAX REGIME FOR F Y 2020-21 A Y 2021-22?

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