The Finance Minister introduced several proposals in relation to the personal tax regime in the Union Budget 2020 presented in the parliament on February 1, 2020.

The Budget 2020 introduced a new income tax regime for individual taxpayers. Bringing a revolutionary change in direct tax rates, Finance Minister Nirmala Sitharaman has proposed a new tax regime, under which new income tax slabs are introduced.

Income Tax Rate under New Tax Regime and Old tax Regime:-

Income tax rate slabs (Rs) Tax as per Old Regime Tax as per New Regime
  Slab Rate Tax a (no tax exemption/deduction available) Slab Rate Tax amt (tax exemption/deduction available, but not considered)
Up to 2.5 lakh Nil 0 Nil 0
2.5-5 lakh 5%** 12500 5%** 12500
5-7.5 lakh 20% 62500 10% 37500
7.5-10 lakh 20% 112500 15% 75000
10-12.5 lakh 30% 187500 20% 125000
12.5-15 lakh 30% 262500 25% 187500
Above 15 lakh 30% 262500+TI*30% 30% 187500+ TI*30%
(Note: The above rates are subject to surcharge and cess, as applicable)
(TI: Taxable income)

*  Basic exemption income slab in case of a resident individual of the age of 60 years or more (senior citizen) and resident individual of the age of 80 years or more (very senior citizens) at any time during the previous year, continues to remain the same at Rs 3 lakh and Rs 5 lakh, respectively, in the existing tax regime.

**can take Rebate under section 87A i.e. no tax up to Rs. 500,000 taxable income (TI)

Firstly, if you are salaried person or you wish to opt for the new tax regime, you will have to inform your employer through the declaration form. The employer will start deducting tax at source (TDS) accordingly for each month. Find out which tax option suits you.

So, In the Above Table you can see that in the new Tax regime, tax rate is lower the could provide relief to individual tax payer but before that, there are some terms and condition to opt the New tax regime that you need to be aware

1) The new tax Regime is optional that means, the assessee have the option to choose between New Tax Regime or Old Tax Regime

2) The New Tax Regime is only applicable if you are willing to give up exemption (such as Leave Travel Allowance (LTA), House Rent Allowance (HRA), etc) and deduction (available under chapter VI A of the Act U/S 80 such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G, 80GG, 80GGA, 80GGC, etc) available under various section of Income Tax Act, 1961

3) Only the deduction under Section 80CCD (2) [i.e., employer’s contribution on account of an employee in a notified pension scheme] and Section 80JJAA [i.e. for new employment] can be claimed.

4) Standard Deduction under Section 16 [which is currently Rs 50,000] available to salaried individuals will be disallowed

5) Also, the deduction on home loan interest, under Section 24(b) will be disallowed

So,

This new scheme is quite confusing for people generally who earn between 25k- 1 lakh per month or a salaried person. Now taxpayer are trying to figure out either the new structure is beneficial or old structure. Several websites have come out with calculators that help individuals figure this out. The Income-Tax Department itself has launched an e-calculator to estimate the tax liability under the new tax slabs. It compares taxes in the old and the new tax regime.

But another point of view is anyone claiming tax exemptions and deductions of more than Rs 2.5 lakh in a year will not gain from the new structure.

This threshold of Rs 2.5 lakh includes the standard deduction of Rs 50,000 for which no investment is required. All salaried taxpayers are eligible for this, which leaves only an additional deduction of Rs 2 lakh. Of this, Rs 1.5 lakh is taken care of by Section 80C investments. The average taxpayer also claims exemption for HRA or claims deduction for the interest paid.

Since the new tax regime has multiple tax slabs with lower tax rates than the current regime but most deductions are not available (see table). Each individual will have to evaluate which regime is favorable to him depending on the deductions and exemptions he plans to claim. Anyone claiming more than Rs 2.5 lakh deduction in a year (including the Rs 50,000 standard deduction) will not gain from the new structure. The Rs 2 lakh threshold will be very easily crossed if you live on rent and claim HRA exemption or have taken a home loan and claim deduction for the interest. Taxpayers who claim the full deduction under Section 80C would be better off sticking to the older tax regime.

But remember once you make the choice, you cannot switch to the other during the rest of the financial year as far as TDS from salary is concerned. However, the employee will have the right to choose whether to go for the new tax system or stick with the old one at the time of filing the tax return. Keep in mind, however, that certain exemptions can only be claimed through the employer so these may not be available at the time of filing return. If more tax has been paid, the taxpayer can claim a refund in the return.

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4 Comments

  1. Suresh Agrawal says:

    I think interest on housing loan will be allowed as deduction…because this is not a deduction, this is loss under the head income form house property. So pls clear the same.

    1. Kavitakohli229 says:

      Sir, Interest on housing loan will be allowed as a deduction under the two Section one is section 24(b) and another one is section 80EE of income tax Act, 1966 So,

      In section 24(b) the deduction of the home loan interest paid for a self-occupied house property is allowed up to Rs 2 lakh and there is no limit for the let out property
      and
      In section 80EE the deduction of the home loan interest paid is Rs.50,000 Additional interest (for first-time buyers)
      so if there is any loss under the head of income from house property. This loss cannot be set-off against any other head of income such as salary, interest income and capital gains etc
      Therefore, you cannot further reduce your taxable income with the loss suffered by you on your house property. Under the existing tax regime, however, set-off of losses from house property for up to Rs 2 lakh is allowed.

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