NEW TAX RATE WHO SHOULD OPT?

In the Finance Bill 2020, Hon’ble FM Smt.Nirmala Sitharaman introduce a new ‘OPTIONAL PERSONAL INCOME TAX RATE/REGIME’ with reduced rate of tax for individual & HUFs. This new tax rate looks very attractive but it has its own pros & corns and need application of mind to choose between old & new tax slab. If anyone avail this new reduced income tax rate, he has to forgo almost all of the exemptions & deductions that they avail of. Before we proceed further, we need to understand both the new as well as old tax slab.

Income Slab (In Rs.) Tax Rate Under New Regime Tax Rate Under Old Regime
Upto 2,50,000/- NIL NIL
2,50,000/- to 5,00,000/- 5% 5%
5,00,001/- to 7,50,000/- 10% 20%
7,50,001/- to 10,00,000/- 15% 20%
10,00,001/- to 12,50,000/- 20% 30%
12,50,001/-to 15,00,000/- 25% 30%
Above 15,00,000/- 30% 30%
* Surcharge will be applicable as earlier.

NEW TAX RATES BENEFICIAL TO WHOM?

From very beginning Indian Income tax is very complicated for common man & for simplification of the same Hon’ble FM has come up with new simplified tax regime. However, with three more tax slabs and need comparison with old tax regime, instead of simplification new tax regime added complication for the tax payers. Now taxpayers are trying to figure out whether the new tax structure is more beneficial or old. The Income-Tax Department itself has launched an e-calculator to estimate the tax liabilityunder both the regime and several other websites are also providing this facility to help individuals. However, the answer is quite simple. You don’t really need to do an elaborate calculation to know this.Anyone claiming tax exemptions and deductions of more than Rs 2.5 lakh in a year will not gain from the new structure and this 2.5 Lakh includes standard deduction of Rs. 50,000/- for which no investment is required. Therefore, one needs to make investment of Rs. 2,00,000/- out of which Rs. 1.50 Lakh is taken care by Section 80 and rest can availed out of number of deductions available under various section. An average taxpayer also claim exemption of either HRA or deduction of interest paid on home loan. There is other deduction as well which can be claimed like NPS, Mediclaim, interest on education loan, donation, interest on saving bank account U/s 80TTA, Leave Travel Allowance etc.

The new income tax structure has its own benefits and drawbacks depending on how much an individual earns annually.Anyone paying taxes without claiming exemptions under the existing system can benefit from paying a lower upfront rate of tax under new tax regime. For instance, taxpayers having gross total income of up to Rs 12 lakh have to pay more under the old system if he has investments less than Rs 1,91,660/-. So, if you are a person with no or few investments to show, you will find new tax regime much simpler to file returnand save taxes.

The interesting proposition about new tax regime is Individual/HUF with no business income can exercise this option every year at the time of filling of return however person with business income can exercise this option on or before the due date of filing of the return & option once exercised shall continue for that year and all subsequent years.

For better understanding of tax implication under new & old regime we are presenting some illustrative cases of different income groups:

Senecio I Senecio II Senecio III
Particulars Low Income Group: High Income Group: Higher Deduction Tax Payer
New Regime Old Regime New Regime Old Regime New Regime Old Regime
Taxable Income  7,50, 000 7,50, 000  40,00, 000 40,00 ,000 11,00 ,000 11,00, 000
Standard deduction    50,000  50,000  50,000
HRA or Interest on Home Loan    60,000 2,00,000  1,80, 000
Deduction U/s 80C 1,00,000 1,50,000   1,50, 000
Mediclaim Policy    10,000  25,000  10,000
Total Deduction/ Exemption –   2,20,000 –   4,25,000 –    3,90, 000
Net Taxable Income  7,50,000 5,30,000  40, 00,000 35,75, 000 11,00, 000  7,10,00
Tax 39,000 18,824 9,75, 000 9,20 ,400 98,800 56,680
Tax Benefit as per Old Regime:     20,176   54,600    42,120

The above calculation shows that for all the three different income group old tax regime is beneficial for the taxpayer compared to new tax regime. So before exercising the option of new regime, one must understand, here are some of the popular exemptions and deductions you won’t get in the new regime. Check which of these you have been claiming before exercise of the option:

1) Standard deduction: Rs 50,000 (Available to all)

2) Leave Travel Allowance (Once in block of two year)

3) House rent allowance: Depends on salary structure and rent paid

4) Housing loan interest: Rs 3.5 lakh for affordable housing, Rs 2 lakh for others

5) 1.50 Lakh Investments under Sec 80C (including PF/PPF/Tution fee/LIC, home loan repayment etc.- generally tution fee, PF, LIC almost all the individuals claim)

6) Interest Paid on education loan U/s 80E

7) NPS contribution: Rs 50,000/-

8) Medical insurance premium: Rs 25,000 (Rs 50,000 for parents and senior citizens)

9) Donation U/s 80G 50%-100% to specified entities.

10) Savings bank interest U/s 80TTA Rs 10,000

11) Interest income (for senior citizens): Rs 50,000 under Sec 80TTB

The above list of deductions & exemptions is just illustrative, apart from the above you won’t get benefit of number of deductions & exemptions under new regime.

FAQ :

Q 1.  Can I choose tax rates (New or Old) every year.

Ans. Yes, an individual or HUF with no business income can switch between new & old rate of tax every year at time of filling of income. However, the person with business income can exercise this option only once & option once exercised shall continue for that year and all subsequent years.

Q 2. I have opted for New tax regime & intimated the same to my employer and accordingly TDS deducted by the employer, but now I want to file return with old regime can I do so?

Ans.  Yes, Individual can exercise his option at the time of filling of return and accordingly his final tax liability will determine.

Q 3. If I have not intimated employer exercise of option between old & new tax regime, at what rate my TDS will be deducted by the employer?

Ans.  If employee doesn’t intimate employer about his option then TDS shall be deducted by the employer considering old tax regime.

As to conclude we can say that old tax regime is beneficialif taxpayer is willing to claim deductions/exemptions and if he doesn’t believe in savings definitely, he should go with new reduced tax slab. However, one should keep in mind achieving life’s goal and securing family future through various investment option should be the reason and not only the tax benefits. As in our country we don’t have social security measures like other developed country.

Disclaimer: The above article is prepared for understanding & study purpose. We recommend you to consult your CA or tax consultant before taking any decision & author will not be responsible for any lose due to decision take on the basis of above article.

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