The dilemma of which scheme should an employee opt for Income tax in FY 20-21

Everything has been changed in the beginning of new FY 2020-21 like the new virus, lockdown, work from home and also popped up new question i.e.  ‘Which scheme should an employee opt for Income Tax ?’

A new section 115BAC is inserted in the Income Tax Act. This section provides for a new option to individuals or HUFs to calculate and pay their taxes in a different way   in addition to the old option.

Recently most of the employees are being asked to opt between one of the schemes of taxation. In this regard, every employee needs to assess whether he wants to opt for new regime or old. This article is an attempt to address the dilemma faced by salaried employees in opting between the two schemes. Let us understand what exactly is this new and old scheme.

In order to deduct taxes from April 2020, every employer needs to get an intimation from the employee regarding the scheme he wishes to opt. Depending upon the scheme, employer shall deduct the TDS of every individual. In case no intimation has been made by the employee, employer shall deduct TDS without considering the provisions of Section 115BAC of the Act, i.e. old scheme shall be presumed to be opted.

It is important to note that for the limited purpose of TDS deduction, employee cannot change the option once intimated to employer. However, employee can still shift to other scheme at the time of filing the tax return. It means, if at a later point of time employee realizes that claiming any of prescribed deduction or allowance would have been more beneficial, he can change the tax regime at the time of filing Income Tax Return and claim refund of taxes, if any. This can be better understood with an example, which is mentioned in the later part of this article.

Summary of practical difference between new and old scheme

New taxation scheme has benefit of reduced income tax rates and old taxation regime has benefit of various exemptions and deductions to reduce the taxable income. In nutshell, old scheme reduces the taxable income and charges higher rate of income tax on this reduced income and on other hand new scheme increases taxable income but charges lower rate of income tax on such increased income. Thus, beneficial scheme would vary from case to case basis.

Prescribed Income tax Rates:

Slab Rates Existing Tax Rate (Old Regime) New Optional Scheme – Tax Rates  (New Regime)
Up to 2,50,000 Nil Nil
2,50,000 – 5,00,000 5% 5%
5,00,000 – 7,50,000 20% 10%
7,50,000-10,00,000 20% 15%
10,00,000-12,50,000 30% 20%
12,50,000-15,00,000 30% 25%
Above 15,00,000 30% 30%

Under new regime, total income of an employee shall be computed without claiming following exemptions or deductions. To state otherwise taxable income shall not be reduced because of following major benefits, as it shall be in the old scheme:

1. House rent allowance as contained in clause (13A) of section 10.

2. Leave travel concession as contained in clause (5) of section 10.

  • Standard deduction, deduction for Entertainment Allowance and Employment/Professional Tax as contained in section 16.

3. Interest under section 24 in respect of self-occupied house property only. Interest in case of let out house property is allowed in new regime also. It is also to be noted that loss under the head income from house property cannot be set off against any other head.

4. Any deduction under chapter VIA (like Section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC.)

5. Allowance for income of minor as contained in clause (32) of section 10.

Few of the major exemptions/deductions available under the new scheme are as follows :

a. Transport Allowance granted to a divyang employee.

b. Conveyance Allowance granted in performance of duties of an office.

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

a. Deduction under Section 80CCD(2) (employer’s contribution on account of employee in notified pension scheme)

b. Daily Allowance to meet the ordinary daily charges

For the taxpayers having business income following major deductions or exemptions won’t be available under new scheme:

32. Additional depreciation under clause (iia) of sub-section (1) of section 32.

33. Deductions under section 32AD, 33AB, 33ABA.

  • Various deductions for donation for or expenditure on scientific research contained in sub-clause (ii) or sub-clause (iia) or sub-clause of sub-section (1) or sub-section (2AA) of section 35.

1. Deduction under section 35AD or section 35CCC.

2. Deduction from family pension under clause (iia) of section 57.

Major exemptions or deductions which are either available or not in New scheme Vs. Old is tabularized herein below:

TAX BENEFITS OLD REGIME NEW REGIME
Sec 10 Exemptions
Leave Travel Allowance under Sec 10(5) Allowed Not Allowed
House Rent Allowance under Sec 10(13A) Allowed Not Allowed
Exemptions of certain Allowances under section 10(14) like Children Education Allowance, Hostel Allowance, Uniform Allowance etc., Allowed Not Allowed
Retrenchment Compensation under Sec 10(10B) Allowed Allowed
Voluntary Retirement Scheme under Sec 10 (10C) Allowed Allowed
Gratuity under Sec 10(10) Allowed Allowed
Conveyance under Section 10(14) for disabled (divyang) employees Allowed Allowed
Leave Encashment at the time of separation under Sec 10(10AA) Allowed Allowed
Sec 16 Deductions
Standard Deduction, Tax on Employment under Sec 16 Allowed Not Allowed
Chapter VIA Deductions
Chap VI Deductions – 80C, 80CCC, 80CCD (1), 80CCD(1B), 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80U, 80TTA, 80TTB, 80G etc., Allowed Not Allowed
Employer Contribution towards NPS u/s 80CCD (2) Allowed Allowed
Sec 24(b) Benefits
Interest on borrowed Housing Loan for a Self-occupied Property Allowed Not Allowed
Interest paid towards Housing loan – For Let-out property
**(Intra-head Set-off of losses allowed in case of income from house property, but loss cannot be set-off with the other head of Income in new regime)
Allowed **Allowed
Set off any loss from House Property to any other head Allowed Not Allowed

Another question that may arise to an individual is, whether the regime needs to be self-assessed every year? The same is discussed in below.

The taxpayers under the scheme have been divided in two ways:

1. Persons not having any Business Income.

2. Persons having Business Income.

In case of Individual/HUF not having any Business Income (Salaried employee):  

1. Option must be exercised every year.

2. The employee must intimate to the employer his intention of getting covered under the old or New Tax regime (as the case may be) every year and employer will deduct TDS accordingly.

3. The option shall be exercised at the time of filing Income tax return.

In case of Individual/HUF having Business Income:

Option can be exercised only once, and it shall be valid for that year and subsequent years unless any stipulated condition gets breached.

A salaried employees might be covered under the head ‘Individuals having Business Income’ under certain scenarios.

It is very important to note that a certain class of salaried employees do fall under the head of ‘Individual having business income’. Various salaried individual do have second source of income from trading in shares. The transactions vary from every individual. Depending upon the same, the income generated from certain specific transactions in shares are taxable under the head ‘Business Income’. For example, income from Futures and Options, Intra day dealing of shares, Derivatives, strategical buy and sell of shares on recurring basis, etc. are the incomes to be disclosed under Business income. Such individuals won’t fall in the category of persons having salaried income but under the later category of individuals having business income. Therefore, utmost precautions are to be taken by every individual who deal in trading of shares, as restrictions and conditions laid upon them are stricter compared to the only salaried individual. It is advisable to consult a tax expert for taking a reasoned call.

Now let us take an example to understand the concept with better clarity.

Assume Mr. X has intimated his employer that he wishes to opt for the new scheme i.e. he won’t be claiming any deduction or exemption so tax rate applicable would be less. Accordingly, monthly TDS amount of Rs 5000 (annual tax amount Rs 60,000) was being deducted from the salary of X. However, in the month of say January 2021, Mr. X realizes that for one reason or another he has already invested in various tax saving benefits like NPS, PF, Mediclaim, LIC, etc. Had he opted for the old scheme, these investments would have been considered for him and reduced the taxable income but as he opted for new scheme such investment would not be considered with benefit of reduced tax rates. At this point he realizes if he opts for old scheme then he might have saved Rs 10,000 in taxes. As discussed above, he can still opt for the old scheme and file his return under old scheme but TDS for the rest of the period would be deducted as per old scheme only. Thus, at the time of filing return, he may opt the old scheme and pay Rs 50,000 as tax and claim the excess TDS of Rs 10,000 as refund.

Mr. X having no business income can switch between the options in next years.

Now coming to the last question, how can an employee self-assess which regime is to be selected?

In order to take this decision an individual needs to go through his/her salary slips/Form 16. One needs to check what are the exemptions and deductions available to him under the old scheme.

In old tax scheme, many individuals used to ‘incur’ investment to save taxes. In respect of new scheme, they may revisit their strategies of incurring such investments. They may analyze, what if they don’t invest and pay taxes at reduced rate in new scheme or make the investment, avail the deduction and pay taxes at higher rate. Following two steps should be followed to take a reasonable call.

  • An individual shall reduce all his exemptions and prospective deductions from gross salary and then apply the old high rates of taxation on such reduced income.
  • Ignore all the deduction and exemptions (except a few as mentioned above) and directly apply the new reduced tax rates on the total income.

Whichever option results in less tax, is obviously more beneficial.

In broadline, the new regime u/s 115 BAC may prove beneficial for the high-income group with minimal tax-saving investments. However, the old (existing) regime may be better suited to the low-to-middle income group if they make sufficient investments in various tax-saving schemes. Hence, there is no set formula to decide between the two regimes. One must calculate the total tax outgo as per both the old and new slab rates before deciding whether to adopt Section 115BAC slab rates or not.

Views expressed in the article are strictly personal opinion of Author

Author Bio

Qualification: CA in Practice
Company: M G D S & Co, Chartered Accountants
Location: Pune, Maharashtra, IN
Member Since: 03 Jan 2020 | Total Posts: 2

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