Budget 2020: Planning To Switch To New Income Tax Rates? Think Again!
Finance Minister Nirmala Sitharaman cut personal income tax rates for those willing to sacrifice exemptions and deductions. But that may actually increase their tax burden.
“Currently, the Income Tax Act is riddled with various exemptions and deductions, which make compliance by the taxpayer and administration of the Income Tax Act by the tax authorities a burdensome process,” Sitharaman said in her budget speech. “It’s almost impossible for a taxpayer to comply with the income tax law without taking help from professionals.”
Here are the proposed as new income tax rates for individuals who forego exemptions...
The proposed tax structure, she said, would provide significant relief to taxpayers and more so to those in the middle class. But a back-of-the-envelope calculation shows that this may not help those individuals who are investing to claim tax deductions.
For Those Earning Between Rs 10 Lakh And Rs 20 Lakh
An individual with a gross annual income of Rs 20 lakh claims deductions of Rs 1.5 lakh under Section 80C of the Income Tax Act—including mandatory contributions to the Employee Provident Fund for all those earning a salary. An additional Rs 50,000 is deductible from the taxable income under Section 80CCD for contributions to the National Pension Scheme.
A health insurance policy with a premium of Rs 25,000 is also deductible under Section 80D.
And then a deduction under house rent allowance of up to Rs 3 lakh is also available. Alternatively, a deduction of Rs 2 lakh per year can be claimed under Section 24 for interest payments on a home loan.
Assuming that an individual avails all these exemptions, the resultant net income would attract a tax of just under Rs 2.5 lakh. That’s over Rs 1 lakh less than the tax under the new regime.
Similarly for an individual earning Rs 10 lakh a year, who makes smaller investments, and claims fewer deductions, the tax under the existing regime would be lower than the new regime.
Arvind Rao said opting for new tax regime might result in a cash flow issue for individuals if they continue making investments as these would no longer be tax-deductible. Therefore, it’s unlikely that an individual, who is currently incurring expenses like premia on health and life insurance, would stop making them simply to migrate to the new tax regime with lower tax rates, the chartered accountant, certified financial planner and founder of Arvind Rao & Associates told BloombergQuint.
For Those Earning Rs 6 Lakh
For an individual earning a gross annual salary of Rs 6 lakh, the compulsory deduction for contributions to the Employee Provident Fund would be around Rs 25,000. Under the old regime, the person would also receive a standard deduction of Rs 50,000.
Assuming the individual makes a nominal contribution to a tax-saving investment product—say an equity-linked savings scheme—of Rs 25,000 in the year, the net taxable income would fall to Rs 5 lakh.
To be sure, other deductions like house rent allowance and leave travel allowance aren’t taken into consideration.
Under both the old and new regimes, if an individual’s taxable income is Rs 5 lakh or less, they effectively pay no tax because of a rebate of up to Rs 12,500 on income tax provided by the government.
Under the new regime, the standard deduction and deductions under Section 80C get knocked off, leaving the taxable income the same as the gross income in this case. As a result, the tax incidence would be Rs 23,400.
“It’s obviously very possible that at the end of the (tax planning) exercise, one may find that you’re better off going under the old regime and not opting for the new regime,” said Ameet Patel, partner, Manohar Chowdhry & Associates. “But everything would depend on the facts of each case.”
Listen in to find out your tax outgo under old and new rates...