Tax relief. This is what every working individual looks forward to every Budget session. This year too, millions of working individuals were looking forward to the big tax relief. The news did come, but in shades and in variants. Finance Minister Nirmala Sitharaman did announce the tax relief for middle-class taxpayers, albeit with a rider. She has handed us two variants and it’s us who has to choose what fits us the best.
Let’s look at both the options and find out its merits and demerits
To begin with let’s first understand personal income tax rate under the new tax regime and the old tax regime:
Below table is on annual basis.
The Union Budget 2020-21 has introduced new income tax regime for the next fiscal. The new income tax slabs are quite different from the old tax rates. If a taxpayer wants to avail of the benefits of new income tax regime, he or she has to forgo over 70 exemptions that are offered in old income tax slabs. A taxpayer has to decide between the old and new tax slabs. Get to know the difference between old and new tax rates or slabs here before making the final choice. Also, know the exemptions or deductions which you will not be able to enjoy if you go for the new income tax regime.
The income tax regime has been made easier on the basis of different income slabs from Rs 5 lakh to Rs 15 lakh and above. If you are opting for new tax rates 2020, you will not be allowed to enjoy several exemptions including deductions under Section 80C/80D, housing rent allowance (HRA), LTC, entertainment allowance, self-occupied or vacant property interest and professional tax. Seven slabs have been introduced for personal income tax. The tax rates on income up to Rs 15 lakh have been reduced to benefit the Indian taxpayers.
Tax payable under old, new tax slabs and net savings (without exemptions)
Exemptions removed in new income tax regime
1) Exemption of up to Rs 1,50,000 lakh under Section 80C for ELSS, NPS, PPF
2) Exemption of up to Rs 25,000 under Section 80D for medical insurance premium
3) Tax benefits for disability under Section 80DD/80DDB
4) Leave travel allowance exemption to salaried employees which could be availed twice in 4 years
5) House rent allowance to salaried individuals
6) Standard deduction of Rs 50,000 to salaried taxpayers
7) Entertainment allowance and professional tax under Section 16
8) Tax benefit on interest on housing loan for a self-occupied or vacant house under Section 24
9) Rs 15000 deduction from family pension under Section 57
10) Tax rebate of up to Rs 12,500 on income up to Rs 5 lakh under Section 87A
11) Deduction of up to Rs 2 lakh on home loan interest
12) Tax break on interest on education loan under Section 80E
13) Tax break on donations to NGOs under section 80G
14) Additional deduction of up to Rs 1.5 lakh on Home Loan interest on affordable houses under section 80EEA
15) Deduction of up to Rs 1.5 lakh for on Auto Loan interest on the electric vehicle under section 80EEB
Claims under these sections will not be entertained under the new tax regime:
1) 80C, 80CCC, 80CCD
2) 80D, 80DD, 80DDB
3) 80E, 80EE, 80EEA, 80EEB
4) 80G, 80GG, 80GGA, 80GGC
5) 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA
Understanding and comparing tax benefits:
The new tax regime – the provision and the catch:
Things to look at:
Condition: If your gross income is Rs 10 lakh or above and you are utilising deductions under Section 80C, 80D, and 24 (b) of the Income Tax Act, 1961
Suggestion: Stick to your older regime; it works in your favour from a tax planning standpoint.
Condition: If you fall under the middle-income group, earning a gross income of say Rs 5 lakh
Suggestion: Must consider The new tax regime, it may prove advantageous.
Condition: If you are aiming at wealth creation through investments in tax-saving instruments; paying premiums to address insurance needs (life and health); paying children’s tuition fees; paying equated monthly instalments (EMIs) of an education loan; buying a house with a home loan; and so on
Suggestion: The old tax regime works in your favour
Condition: If you don’t believe in investments in policy schemes, you prefer to pay taxes without claiming exemptions
Suggestion: You can benefit from paying a lower upfront rate of tax. For instance, taxpayers having gross total income of up to Rs 12 Lakh have to pay more under the old system if he/she has investments less than Rs 191 lakh. Therefore, if you invest less in tax-saving schemes, go for the new regime.
Condition: Individuals having fair amount of investments in tax free savings schemes like PPF, NPS
Suggestion: Continue with the old regime as deductions under these schemes cant be claimed under the new tax regime. If you move to the new system with lower tax rate, you will end up paying more tax. Claiming up to Rs 2 lakh in tax deductions can provide significant tax relief under the existing system.
1) Under the new tax regime, one need not stress over complex filings of tax returns, hence fewer mistakes in filing. If you are a person with no or few investments to show, you will find it much simpler to file taxes under the new system.
2) The exclusion of 70 exemptions also helps in containing income tax frauds. There are many cases where people have inflated their return filing for claiming more tax refunds. However, with a majority of exemptions gone under the new system, the scope of misusing exemption rules also reduces.
1) The new income tax regime can potentially lower household savings as many people will refrain from investing in tax-free schemes due to exclusion of 70 common exemptions. Despite an upfront reduction in the tax rate, it will affect long term savings of an individual.
2) The new income tax structure could also discourage investments in the real estate sector. It may be noted that investment in housing property is a major tax saver for Indian households and making the full use of it can earn very high tax deductions. However, with no such exemptions under the new tax structure, the real estate sector could encounter falling demand. The insurance sector will also suffer as it will have to put more effort and money on advertisements to attract people to invest. The new income tax structure, therefore, may lead to reduced business for insurance companies.
Tips to save tax:
1) If you have salary income, you have the flexibility to choose either of the Tax Structure Format depending on your salary.
2) So for eligible start-ups in ESOP, there isn’t any tax for next 5 years after the registration.
3) Housing loans are extended and benefited by another one year.
4) If an employee has a total deduction/allowance below Rs 2.5 lakh then new regime is beneficial, any deduction above Rs 2.5 lakh then old is beneficial.
5) It can be said that an employee can save up to Rs 80,000 annually when he/she opt for tax benefits components like the meal, LTA, gift, etc.
6) When an employee opts for the meal tax benefit, he/she can save Rs 50 per meal and Rs 35 for tea and snacks or the company could provide Rs 135 per working day as the maximum allowance to the employee, i.e, an employee can save up to Rs 42,120 as a tax benefit.
7) When an employee opts for fuel and driver salary benefits towards a vehicle used partly for official and partly for personal purposes by an employee and their household members. He/she can save between Rs 2,700 -3,000/month (depends upon the vehicle CC). When an employee opts for mobile/Internet communication benefits incurred by an employee on behalf of their employer, as part of work. He/she can save up to Rs 2,500/month (annual value of perquisite is Rs 30,000) but actually can claim up to Rs. 9,000 p.a. (yearly tax-saving at 30 percent slab).
8) When an employee opts for LTA (Leave Travel Allowances) for travel concession for employees from their employer for themselves and family for travel within India. He/she can save up to Rs 5,550/month (annual value of perquisite is Rs 66,000) but actually can claim up to Rs 19,800 p.a (yearly tax-saving at 30 percent slab).
Based upon the employee Tax benefit slab, the employee can save up to the maximum of:
a) An employee in the 5% tax slab save: Rs 11,540 a year
b) An employee in the 20% tax slab save: Rs 46,160 a year
c) An employee in the 30% tax slab save: Rs 69,240 a year
(The writer is Founder, Zaggle, a fintech company)