Budget 2020: The new optional income tax rates are low, but you can’t claim exemptions
Those earning up to Rs 5 lakh a year will not pay any tax either in the old regime or in the new regime; the tax rate also remains same at 30% for those earning over Rs 15 lakh a year
The new income tax slabs proposed by Finance Minister Nirmala Sitharaman in Budget 2020 appear lower than the existing tax slabs. But that is because you need to forego all the tax exemptions to claim the lower rates. This, effectively, means, tax payers need to compare both the tax slab structures properly to see where they save more tax.
Of course, those earning up to Rs 5 lakh will not pay any tax either in the old regime or in the new regime and so they have no problem. Importantly, the government has kept the new and lower tax rates optional, which means you can still stick to the existing rate structure if you want to. But, as the Finance Minister indicated in the post-budget press meet, the government plans to remove all tax exemptions in the long-run. This means you will slowly need to delink investing and tax-saving. Read on.
The new income tax structure
The new income tax structure proposed significantly reduces rates for the individual taxpayers who forgo certain deductions and exemptions.
Under the new regime, an individual shall be required to pay tax at a reduced rate of 10% for income between Rs 5 lakh to Rs 7.5 lakh against the current rate of 20%.
For income between Rs 7.5 lakh to Rs 10 lakh, he/she will pay at the reduced rate of 15% against the current rate of 20%.
Similarly, for the income between Rs 10 lakh to Rs 12.5 lakh the taxpayer will pay at the reduced rate of 20% against the current rate of 30%.
An income between Rs 12.5 lakh to Rs 15 lakh will be taxed at the reduced rate of 25% against the existing rate of 30%.
Incomes above Rs 15 lakh will continue to be taxed at a rate of 30%.
You can take a look at the existing and new rates in the table below.
It’s optional
The new tax regime shall be optional for the taxpayers. An individual who is currently availing more deductions and exemption under the Income Tax Act may choose to avail them and continue to pay tax in the old regime.
Kindly note that Finance Minister reviewed all the exemptions and deductions (currently more than 100) which got incorporated in the income tax legislation over the past several decades and has removed around 70 of them in the new simplified regime. “We will review and rationalise the remaining exemptions and deductions in the coming years with a view to further simplifying the tax system and lowering the tax rate,” Sitharaman said.
Also please note that there are certain exemptions still available under the new tax regime. We will update the article as the government comes up with the detailed note on the same.
The Catch
The new tax rates can be availed only if you do not claim exemptions. This is the big catch!
The new tax regime (section 115BAC) does not allow you to avail deductions related/linked to leave travel concession, house rent allowance, standard deduction, deduction for entertainment allowance and employment/professional tax, interest under section 24 in respect of self-occupied or vacant property, section 80C (ELSS, life insurance etc.), 80CCC, 80CCD, 80D (medical insurance), 80DD, 80DDB, 80E (education loan), 80EE, 80EEA etc. All this means that you will have to calculate tax for your case. Please note that you should not blindly follow any advice regarding one tax structure being better than the other.
“Revision of tax slabs was an eagerly anticipated positive, but it has been offset by the rider of forgoing exemptions/deductions. Nevertheless, individuals have the option to continue with the prevalent tax structure,” says Krishna Karwa, Senior Research Analyst, iFAST Financial India.
For instance, a person earning Rs 15 lakh and claiming deductions and exemptions can still be better off paying as per existing tax rates compared to newer tax rates. Assume your income is Rs 15 lakh and you claim no deductions & exemptions, then your tax outgo is Rs 1.75 lakh if you opt for new rates (Rs 25,000 tax for income between Rs 5 lakh to Rs 7.5 lakh, Rs 37,500 for income between Rs 7.5 lakh to Rs 10 lakh, Rs 50,000 for income between Rs 10 lakh to Rs 12.5 lakh and Rs 62,500 for income between Rs 12.5 lakh to Rs 15 lakh).
In comparison, if you claim deductions of Rs 1.5 lakh under Section 80C, Rs 25,000 deduction for medical insurance premium, and Rs 2 lakh deduction for home loan interest, then your taxable income falls to Rs 11.25 lakh. Under the existing tax rates, your tax liability will be Rs 1.5 lakh only i.e. Rs 25,000 less than the new rates. Not only you are paying lower taxes, you also get to invest in tax saving funds or provident funds, pay for your medical insurance, and avail of other exemptions.
“The alternative provided to individuals for lower rate of tax, provided they do not claim exemptions/deductions, did not seem too attractive. The alternative tax system discourages investments which market participants do not seem to be comfortable with,” says Dhiraj Relli, MD & CEO, HDFC Securities.
The new tax slabs definitely avoid complexity but do not opt for them just for their simplicity. You may end up paying more tax if you are not careful.
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