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Opting for the new tax regime? You must keep these points in mind

income tax, Budget 2020, new income tax regime, tax benefits, house rent allowance, HRA, HRA benefits, rent paid, tax savings, rent paid to parents, rent paid to spouse

The Union Budget 2020 has proposed to introduce an optional new tax regime for individual taxpayers. The proposal reduces the overall tax liability for taxpayers in the income bracket of Rs 5 to Rs 15 lakh. The aim is to simplify the income-tax law for individual taxpayers by removing certain tax exemptions and deductions. Let us understand how you can exercise your choice for the optional new tax regime.

New tax regime vs existing regime:

The optional tax regime proposed new income slab rates.

New slab rates

Existing slab rates

Income from Rs 2.5 to 5 lakh

5%

Income from Rs 2.5 to Rs 5 lakh

5%

Income from Rs 5 lakh to 7.5 lakh

10%

Income from Rs 5 to 10 lakh

20%

Income from Rs 7.5 to 10 lakh

15%

Income above Rs 10 lakh

30%

Income from Rs 10 to 12.5 lakh

20%

 

Income from Rs 12.5 to 15 lakh

25%

Income above Rs 15 lakh

30%

However, a taxpayer choosing the optional new tax regime should forego certain tax deductions and exemptions. To name a few prominent benefits, a taxpayer should forego the standard deduction against salaries, exemptions for house rent allowance or deductions for housing loan interest (self-occupied) and principal repayments, the deductions for tax saving investments and medical insurance.

Tax payable without claiming any exemptions or deductions under both the regimes:

Annual income

Existing regime

New regime

Tax savings

Up to Rs 7,50,000

65,000

39,000

26,000

Up to Rs 10,00,000

117,000

78,000

39,000

Up to Rs 12,50,000

195,000

130,000

65,000

Up to Rs 15,00,000

273,000

195,000

78,000

Thus, in the absence of a claim for any exemptions and deductions, a taxpayer stands to save tax at the various income levels presented above.

Calculate your yearly deductions including investments and payments and exercise your choice:

We illustrate with an example of a taxpayer who is entitled to deductions for investments and payments, the comparison between the existing slab rates and optional slab rates:

For a salary of Rs 10 lakh

       

Income

 

Existing regime

New regime

Difference

Salary

1,000,000

     

Less: Standard deduction

50,000

     

Less: Professional tax

2,400

     
 

947,600

     

Less: HRA exemption

200,000

     

Gross total income

747,600

     

Less: Deduction u/s 80C

150,000

     

Less: Deduction u/s 80D

25,000

     

Total income

572,600

     

Income-tax

 

27,020

75000

 

Add: Education cess @ 4%

 

1,081

3000

 
   

28,101

78000

-49,899

In the above example, a taxpayer who foregoes standard deduction for salaries, tax exemptions and deductions pays an extra income-tax of Rs 49,899 under the optional new tax regime.

Thus, the choice between the existing tax regime and new tax regime should be exercised after calculating the deductions available including investments and payments of your house rent or EMIs for your self-occupied house, yearly commitments of life insurance premiums and medical insurance, children's tuition fee, and other tax-saving investments. Mathematically, if your deductions including payment for annual savings like LIC premiums, EPF contribution and payments for rent or housing loan EMIs, medical insurance and so on exceed the limits mentioned below, you should choose to continue with the existing regime over the optional new tax regime:

Annual income

Deductions including investments and payments

Up to Rs 7,50,000

125,000

Up to Rs 10,00,000

187,500

Up to Rs 12,50,000

208,333

Up to Rs 15,00,000

250,000

Thus, in the case of an individual whose total income or salary package is Rs 10 lakh and entitled to deductions including investments and payments for tax savings above Rs 1,87,500, the taxpayer can choose to continue with the existing regime. However, if the aggregate deductions are less than Rs 1,87,500, the new regime will be beneficial for the taxpayer.

In the case of a business taxpayer, deductions such as additional depreciation, pre-commencement expenses, scientific research expenses and so on would not be available under the new tax regime. The deductions under chapter VI-A from section 80C to 80U [except section 80CCD(2) and 80JJAA)] are not available to both salaried and business taxpayers.

by, Archit Gupta, Founder, CEO, ClearTax