How the new income tax regime will impact taxpayers under different incomes

Will taxpayers save under the new regime?
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Will taxpayers save under the new regime?

Your personal income taxes just got more complex. In Union Budget 2020, Nirmala Sitharaman introduced a "simplified", optional regime with three new tax slabs. However, taxpayers can continue with the existing structure if that suits them more. Although the doing away of exemptions and deductions simplifies compliance, taxpayers who exploited deductions to the fullest may pay more tax under the new regime. The budget has tried to put more money in the hands of taxpayers by curtailing the incentives to save.

The tax exemption given to incomes up to Rs 5 lakh remains unchanged. Salaried taxpayers who opt for the new regime will have to forgo standard deduction as well as exemptions under chapter VI-A, including HRA, investments under Section 80C, medical insurance premium and even leave travel allowance which is tax free, if claimed once in a block of two years.

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​New income tax slabs and rates
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​New income tax slabs and rates

What’s out: Here are a few of the 70 exemptions and deductions you won’t see in the new regime- Section 80C investments, house rent allowance, home loan interest, leave travel allowance, medical insurance premium, standard deduction, savings account interest, education loan interest.

What stays: Around 50 tax exemptions remain untouched, including- Standard deduction on rent, agricultural income, income from life insurance, retrenchment compensation, VRS proceeds, leave encashment on retirement.

Surcharges on tax remain untouched. Taxpayers with income between Rs 50 lakh and Rs 1 crore continue to pay 10% surcharge, between Rs 1 crore and Rs 2 crore pay 15%, between Rs 2 crore and Rs 5 crore pay 25% and those with income over Rs 5 crore pay 37%. So those earning just below these limits will not benefit if they forego the exemptions and move to the new regime. Given below is the math to explain how the new regime will affect tax outgo of taxpayers at different income levels.

Income: Rs 15 lakh
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Income: Rs 15 lakh

From the calculations above, we see that it makes sense for this taxpayer to shift to the new regime with reduced income tax rates. With or without deductions, he would continue to pay more under the existing regime. The new regime helps him cut his tax outgo.

Income: Rs 30 lakh
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Income: Rs 30 lakh

Here, the existing tax regime with deductions is the one that minimises tax outgo. The taxpayer will not benefit if he makes the switch to the new regime.

Income: Rs 60 lakh
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Income: Rs 60 lakh

For a salaried taxpayer with an annual income of Rs 60 lakh, again the current, existing regime with deductions is more tax efficient. Under the new regime, the tax outgo is more than Rs 60,000 higher.

​Income: Rs 1.2 crore
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​Income: Rs 1.2 crore

Here too, the tax outgo is higher under the new regime. If the taxpayer chooses to make the switch, his tax out go will be more than Rs 62,000 higher than what he would be paying in the existing regime with deductions.

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