INTRODUCTION: The new tax regime introduced by Budget 2020 for individual taxpayers provide for concessional tax rates with reference to tax rates in the old regime. The new tax regime has lower income tax rates for income up to 15 lakh but what needs to be focused upon is that lower income tax rates are available only if a taxpayer is willing to give up exemptions and deductions available under various provisions of Income tax act, 1961. Since, most exemptions and deductions are not available which reduces the associated compliance and documentation, the assessment of which regime holds an upper hand is of utmost importance. Salaried individuals are granted an option to choose between old and new scheme at the time of making their tax declaration to employer for the purpose of TDS. Having said that, even if any individual chooses one option at the time of making declaration to employer for TDS, he is free to change the option and select another one, at the time of filing the ITR. Salaried individuals and pensioners would be eligible to switch between new tax regime and old tax regime as per their convenience every year, provided they don’t have business income. However, other individuals with business income can switch back to old tax regime but only once in a lifetime.
Example – Consultants whose income is chargeable under the head profits and gains from business and profession.
SLAB RATES UNDER NEW V/S OLD TAX REGIME
|INCOME SLABS||TAX RATE(UNDER OLD SYSTEM)||TAX RATE (UNDER NEW SYSTEM) WITHOUT EXEMPTIONS AND DEDUCTIONS|
|Up to 2.5 lakh||NIL||NIL|
|Above 15 Lakh||30%||30%|
NOTE: The above rates mentioned do not include surcharge and cess. Tax rates under old regime have been taken for residents up to 60 years of age. While the old regime had different tax slabs for different age groups, new tax does not provide the varied tax slabs on basis the age groups.
EXEMPTIONS AND DEDUCTIONS TO BE FOREGONE BY A SALARIED INDIVIDUAL UNDER NEW REGIME
New tax regime requires taxpayer to forego exemptions and deductions which are listed down as follows:
HENCE a taxpayer has to forego all Tax-saving investment deductions under Chapter VI-A (80C,80D, 80E,80CCC, 80CCD, 80D, 80DD, 80DDB,, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) (Except, deduction under Section 80CCD(2)—employers contribution to NPS, and Section 80JJA) and so on.
These tax saving investment options include ELSS, NPS, PPF, tax break on insurance premium among others.
SCENARIO ANALYSIS OF OLD AND NEW TAX REGIME ON THE BASIS OF BREAKEVEN OF INVESTMENTS MADE
|GROSS INCOME (A)||TAX UNDER NEW SYSTEM EXCLUDING CESS(B)||BREAK-EVEN DEDUCTIONS( INC STANDARD DEDUCTION) TO MAINTAIN EQUILLIBRIUM WITH NEW TAX(C)||TAX UNDER OLD SYSTEM AFTER CONSIDERING DEDUCTIONS UNDER (C)|
|15,00,000 and Above||>=1,87,500||2,50,000||>=1,87,500|
Note: Under Sec 87A, individuals with total income (after deductions) that do not exceed Rs.5 lakhs can claim a rebate of Rs.12500 which has been maintained in new taxation regime also. Cess has been ignored while calculating taxes as it is common in both old and new taxation regime @ 4%.
For E.g. Mr. A gets salary of 15 lakhs and he has deduction u/s 80C amounting to Rs 1,50,000, standard deduction of Rs 50000 and also HRA of 60,000. Since he has deductions higher than the break-even point of 2,50,000 he’ll save taxes under old taxation regime.
COMPARISON OF TAXATION ON THE BASIS OF QUANTUM OF DEDUCTIONS
|PARTICULARS||LOW DED UCTI ONS||MEDIUM DE DU CTIONS||HIGH DE DUC TIONS||VERY HIGH DED UCT IONS||BREAK EVEN DEDUCTIONS|
|LOSS FROM HOUSE PROPERTY||2,00,000|
|GROSS TOTAL INCOME||15,50,000||15,50,000||13,50,000||11,90,000||15,50,000|
|DEDUCTIONS U/s 80C||1,50,000||1,50,000||1,50,000||1,50,000|
|DEDUCTION U/s 80D||50,000||50,000|
|NET TAXABLE INCOME||15,50,000||14,00,000||12,00,000||9,90,000||13,50,000|
|TAX AT OLD RATES||2,88,600||2,41,800||1,79,400||1,14,920||2,26,200|
|TAX AT NEW RATES||2,26,200||2,26,200||2,26,200||2,26,200||2,26,200|
|GAIN/(LOSS) UNDER NEW REGIME||62,400||15,600||(46,800)||(1,11,280)||TAX AMOUNTS AT EQUIL LIBRIUM AS DEDU CTONS EQUAL TO 2,50,000.|
POINTS TO BE NOTED:
Both taxation regimes have their own pros and cons. The old taxation regime inculcates habit of investing in a taxpayer. New taxation regime is better for employees with less salary and less investments resulting in lesser deductions and exemptions. New taxation regime is cleaner and simple involving lesser or no documentation and lesser chances of fraud for tax evasion. Everyone will have their own set of deductions and exemptions so need to assess comparatively both the regimes to see what works best for them.
The new income tax regime will suit those who don’t claim too many deductions or want to avoid the paperwork of tax planning. This could include non-salaried taxpayers (including consultants) who are not eligible for exemptions and deductions under Chapter VI-A. It could also include senior citizens who do not draw pension from their employer and are therefore not eligible for the standard deduction of Rs 50,000. However, senior citizens earn a big portion of their income from interest and enjoy an exemption of Rs 50,000 for interest income under the newly introduced Section 80TTB. They will be better under existing regime.
DISCALIMER: The above post is only for the purpose of academic discussion and should not be construed as any legal opinion in any matter whatsoever.