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    Impact of proposed new income tax rates on a Rs 20 lakh salary

    Synopsis

    Here is how much total deductions and tax-exemptions a person with Rs 20 lakh total salary income in a financial year should claim so that his/her tax-liability remains the same in both tax structures.

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    Standard deduction of Rs 50,000 and various deductions available under Chapter VI-A of the Income Tax Act have been considered.
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    Budget 2020 proposes to give taxpayers the option of paying taxes either as per the existing tax structure or forgo most tax exemptions and deductions to pay as per a new lower income tax rate regime. How can a salaried individual earning more than Rs 15 lakh, say Rs 20 lakh, decide if he/she should continue with the existing tax regime or opt for the new tax regime?

    Given below is a table that shows how many total deductions and tax-exemptions a person with a total salary income of Rs 20 lakh in a financial year should claim so that his/her tax-liability remains the same in both tax structures.

    Particulars

    Tax payable in Existing Regime

    Tax payable in New Regime

    Basic Salary + DA

    7,77,200

    7,77,200

    Other Taxable Allowances

    12,22,800

    12,22,800

    Gross Salary

    20,00,000

    20,00,000

    Standard Deduction

    -50,000

    -

    Income under the head salary

    19,50,000

    20,00,000

    Chapter VIA deductions

    -2,00,000

    -

    Income under the head salary

    17,50,000

    20,00,000

    Income Tax (Rebate u/s 87A is NIL)

    3,37,500

    3,37,500

    Cess @ 4%

    13,500

    13,500

    Total tax, surcharge and education cess

    3,51,000

    3,51,000

    Source: EY India; (Amount: in Rs.)

    As shown in the table above, the amount of tax payable by the individual would be the same in both regimes if he/she manages to claim total deductions and/or exemptions of Rs 2.5 lakh. One thing an individual must keep in mind is that as one's income rises above Rs 15 lakh, the total amount of deductions and tax-exemptions that he/she must claim to pay the same tax amount in both regimes remains the same. This means that whether your income is Rs 15 lakh or Rs 20 lakh, the total amount of tax-exemptions and deductions to claim in existing tax regime to remain at a tax neutral position vis-à-vis the new tax regime will remain at Rs 2.5 lakh.

    To decide whether to opt for the new tax regime or not a person with Rs 20 lakh income just needs to calculate the total amount of deductions and tax-exemptions that are currently claimed by him/her. If the total is equivalent to or exceeds Rs 2.5 lakh, then he/she would pay the same or less tax in the existing tax regime vis-à-vis the new regime. On the other hand, if the total tax-exemptions and deductions claimed are less than Rs 2.5 lakh, then the individual would be better off opting for the new tax regime. Therefore in this case, it won't be beneficial tax-wise to opt for the new tax-regime unless the individual's total deductions and tax-exemptions are less than Rs 2.5 lakh.

    The figure of Rs 2.5 lakh can be arrived at by availing various deductions such as Section 80C, 80D, standard deduction etc. and tax-exemptions such house rent allowance (HRA), leave travel allowance (LTA) etc.

    In the above example, standard deduction of Rs 50,000 (which is available to a salaried individual) and various deductions available under Chapter VI-A of the Income Tax Act have been considered. These deductions include: Section 80C deduction of maximum Rs 1.5 lakh, section 80D deduction for health insurance premiums paid and other deductions for which a taxpayer is eligible, section 80TTA deduction for interest received from a saving account held with bank or post office etc.
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