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    New income tax slabs: Will you gain by switching to new regime?

    Synopsis

    Budget 2020 had proposed an alternate income tax structure, which has come into effect fro April 1, 2020. Find out whether you will benefit or not.

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    On its part, the Finance Ministry expects four out of five taxpayers to move to the new tax regime.
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    Some taxpayers were expecting income tax slabs to be widened in Budget 2020, while others were hoping the exemptions and deductions would be increased. Naturally, everyone wanted the tax structure to be simplified and their income tax to come down. Budget 2020 dashed a lot of these hopes. While it indeed widened the income tax slabs and reduced tax rates, it also made it clear that taxpayers who opt for the new regime will have to forego most of the exemptions and deductions that they avail of.

    Out go all the exemptions and deductions under Chapter VI-A, including the house rent allowance (HRA), investments under Section 80C of the Income-tax Act, NPS contribution, medical insurance premium and even the leave travel allowance which is tax free, if claimed once in a block of two years. The deductions under Chapter VI-A add up to a significant amount. In their returns for the financial year 2017-18, individual assessees claimed deduction for more than Rs 4.45 lakh crore.

    Although the removal of tax exemptions and deductions makes compliance less tedious, avid tax planners who maximised their deductions will probably shell out more tax under the new regime. In effect, the budget has tried to put more money in the hands of taxpayers by curtailing the incentives to save.

    On its part, the Ministry of Finance expects four out of five taxpayers to move to the new tax regime. It analysed the income and investment data of 57.8 million taxpayers and found that 69% would save on tax under the new system. Another 20% might want to switch to avoid the hassles and paperwork involved in tax planning.

    New tax slabs and rates
    new-tax-slabs

    Will you benefit?
    Tax was already not-so-simple for the average Indian. With three more tax slabs, the new tax regime has only added to the complication. Taxpayers are trying to figure out whether the new tax structure is more beneficial. Several websites have come out with calculators that help individuals figure this out. The Income-Tax Department itself has launched an e-calculator to estimate the tax liability under the new tax slabs. It compares taxes in the old and the new tax regime.

    You don’t really need to do an elaborate calculation to know this. The answer is actually quite simple. Anyone claiming tax exemptions and deductions of more than Rs 2.5 lakh in a year will not gain from the new structure.

    This threshold of Rs 2.5 lakh includes the standard deduction of Rs 50,000 for which no investment is required. All salaried taxpayers are eligible for this, which leaves only an additional deduction of Rs 2 lakh. Of this, Rs 1.5 lakh is taken care of by Section 80C investments. The average taxpayer also claims exemption for HRA or claims deduction for the interest paid on a home loan. Then there are other deductions such as the contribution to the NPS, the interest on education loans, treatment of illness and for disabilities. There is also the small but widely claimed exemption of up to Rs 10,000 for savings bank interest under Section 80TTA.

    What's out
    Here are some of the 70 exemptions and deductions you won’t get in the new regime. Check which of these you have been claiming:
    • Standard deduction: Rs 50,000
    • House rent allowance: Depends on salary structure and rent paid
    • Housing loan interest: Rs 3.5 lakh for affordable housing, Rs 2 lakh for others
    • Investments under Sec 80C: Rs 1.5 lakh
    • Leave travel allowance: Tax free if claimed once in block of two years
    • NPS contribution: Rs 50,000
    • Medical insurance premium: Rs 25,000 (Rs 50,000 for parents and senior citizens)
    • Savings bank interest: Rs 10,000 under Sec 80TTA
    • Interest income (for senior citizens): Rs 50,000 under Sec 80TTB
    • Education loan interest: Interest paid for eight consecutive years
    • Disability of self or dependant: Rs 75,000 to Rs 1.25 lakh depending on disability
    • Treatment of self or dependant for specified disease: Rs 40,000 (Rs 1 lakh for senior citizens)
    • Donations to specified entities: 50-100% of the amount donated

    What stays
    Some 50 tax exemptions have been left untouched in the Budget. These include:
    • Standard deduction on rent: 30% of the rent received
    • Agricultural income: No limit
    • Income from life insurance: If insurance cover is 10 times the annualised premium
    • Retrenchment compensation: Rs 5 lakh
    • VRS proceeds: Rs 5 lakh
    • Leave encashment on retirement: Rs 3 lakh (No limit for govt workers)

    This threshold of Rs 2.5 lakh deduction applies to incomes above Rs 15 lakh. The breakeven point is even lower for those in the lower income brackets. Mrinal Chakraborty claims deductions of only Rs 2.2 lakh, but will pay more tax if he shifts to the new regime. “The 2020 budget has not lived up to the expectations of taxpayers. The income tax proposals are disappointing,” says Ankur Choudhary, Co-Founder & CIO, Goalwise.com.

    Mrinal-Chakraborty
    In Pic: Mrinal Chakraborty, 31 years, Program Manager, Pune

    Low income taxpayer
    He doesn’t claim too many deductions but his tax will rise by more than Rs 16,000 if he switches to the new structure.
    • Taxable income: Rs 8.2 lakh
    • Deductions claimed
    • Standard deduction: Rs 50,000
    • Sec 80C: Rs 1.5 lakh
    • Medical: Rs 20,000
    • Total deductions: Rs 2.2 lakh
    • Tax (old): Rs 33,800
    • Tax (new): Rs 49,920

    Medha-Gupta
    In Pic: Medha Gupta, 35 years, private sector employee, Noida

    Taxpayer with high deduction
    HRA exemption and deductions reduce her tax significantly. She will lose roughly Rs 48,000 under the new structure.
    • Taxable income: Rs 11 lakh
    • Deductions claimed
    • Standard deduction: Rs 50,000
    • HRA: Rs 1.68 lakh
    • Sec 80C: Rs 1.5 lakh
    • Medical insurance: Rs 50,000
    • TOTAL DEDUCTIONS: Rs 4.18 lakh
    • Tax (old): Rs 50,856
    • Tax (new): Rs 98,800
    Can anybody save Rs 78,000?
    Finance Minister Nirmala Sitharaman said in her budget speech that a taxpayer earning Rs 15 lakh will save Rs 78,000 in tax under the new regime. However, this assumes that the taxpayer is not claiming any deduction at all. In reality, the standard deduction applies automatically to all salaried taxpayers. Also, there are several expenses that are eligible for tax benefits, such as tuition fee of up to two children which can be claimed as a deduction under Section 80C.

    Sameer-Gokhale
    In Pic: Sameer Gokhale, 49 years, CEO of tech firm, Pune

    High income earner
    Moving to new structure will hike his tax by Rs 52,000 but reduce compliance headaches for this high-income earner.
    • Taxable income: Rs 38 lakh
    • Deductions claimed
    • Standard deduction: Rs 50,000
    • Sec 80C: Rs 1.5 lakh
    • Home loan interest: Rs 1.8 lakh
    • Medical insurance: Rs 12,000
    • Donations: Rs 25,000
    • Total deductions: Rs 4.17 lakh
    • Tax (existing): Rs 8.60 lakh
    • Tax (new): Rs 9.12 lakh

    The new ncome tax structure will suit those who don’t claim too many deductions or want to avoid the paperwork of tax planning. This could include non-salaried taxpayers (including consultants) who are not eligible for the host of exemptions and deductions under Chapter VI-A. It could also include senior citizens who do not draw pension from their employer and are therefore not eligible for the standard deduction of Rs 50,000.

    However, senior citizens earn a big chunk of their income from interest and enjoy an exemption of Rs 50,000 for interest income under the newly introduced Section 80TTB. Retired PSU staffer T. Joseph gets pension from his former employer and also earns interest. He will be better off in the existing tax regime.

    T.Joseph
    In Pic: T. Joseph, 61 years, Retired PSU employee, Delhi

    Senior citizen pensioner
    His tax will shoot up by Rs 18,200 under the new structure. He is better off in the existing regime.
    • Taxable income: Rs 9 lakh
    • Deductions claimed
    • Standard deduction: Rs 50,000
    • Sec 80C: Rs 1.5 lakh
    • Interest income Sec 80TTB: Rs 50,000
    • Total deductions: Rs 2.5 lakh
    • Tax (old): Rs 41,600
    • Tax (new): Rs 59,800

    No incentive to save
    The option to remove tax exemptions and deductions is also worrying investment experts. Section 80C forces individuals to save, and they will be weaned off savings if there is no tax incentive. “The impetus seems to be towards spending, rather than focusing on longer term financial security for individuals. Individuals who opt for the new tax regime and forgo tax exemptions may end up spending money than use it towards their financial safety and security,” says Tarun Chugh, Managing Director and CEO of Bajaj Allianz Life Insurance. “The alternative provided to individuals for lower tax rates if they do not claim exemptions and deductions does not seem too attractive. The new system discourages investments,” says Dhiraj Relli, Managing Director & CEO, HDFC Securities.

    In fact, tax benefits are the prime drivers of investment decisions in India. NPS was always a very good investment opportunity but it started attracting investors only after the additional tax deduction of Rs 50,000 was introduced in 2015. It became even more popular after the new rule that makes 60% of the corpus tax free on maturity came into effect. “Doing away with the exemptions goes against the basic concept of financialisation of savings,” rues Swarup Mohanty, Managing Director and CEO, Mirae Asset Mutual Fund.

    On the other hand, some experts feel that the budget has done the right thing by separating tax benefits from investments. “In the name of tax savings, many taxpayers are making significant and far reaching investment mistakes. This misbuying may stop after the tax incentives are removed,” says Nitin Vyakaranam, Founder and CEO of financial planning firm Arthayantra. His views are echoed by others. “The core objective of insurance is protection. It’s time the middle class bought insurance for its real benefit, which is protection,” says Yashish Dahiya, Co-founder & CEO, Policybazaar.com.

    Choosing between old and new
    To be fair, taxpayers will have the option to switch to the new tax structure. “This is a good move because taxpayers will be able to make the choice depending on their financial situation,” says Sudhir Kaushik, Co-founder of Taxspanner. “Taxpayers who avail several exemptions and deductions such as house rent allowance and Section 80C deductions may not benefit from switching to the new system,” says Amit Maheshwari, India Tax Leader at Ashok Maheshwary & Associates.

    What’s more, CBDT chairman P.C. Mody has clarified that individual taxpayers will have the option to switch from the old regime to the new structure and vice versa every year. If a taxpayer has made certain investments or expenses in a certain year, he can shift to the old system. However, Mody also clarified that business owners won’t have this option to switch back and forth every year.

    The budget, however, left the surcharge on tax untouched. Taxpayers with income between Rs 50 lakh and Rs 1 crore will continue to pay 10% surcharge on the tax. The surcharge is 15% for income between Rs 1 crore and Rs 2 crore, 25% for between Rs 2 crore and Rs 5 crore and 37% for income over Rs 5 crore.

    So taxpayers earning just below these threshold limits will not benefit if they forego the exemptions and move to the new tax regime.

    30 Comments on this Story

    S Govindaswamy19 days ago
    You have given Rs 59,800 as the tax(new) payable by Senior Citizen Pensioner T. Joseph. I understand that he will not get any deduction and has to pay tax on the full income of Rs 9 lakhs
    Deepak Kanchi20 days ago
    There have been sweeping changes to the Indian tax laws with respect to residential status of an individual which may result in expanding his tax base in India and he may qualify to be a ‘stateless’ person.
    Recent changes to Residential Status definition under the Income Tax Act. If you are an NRI - this article, first in the series, is a must-read.
    Click to Read Now: https://bit.ly/39fOZUC
    Ashutosh Agarwal112 days ago
    The deduction threshold is not 2.5 lac as mentioned in the article but 2.18 lac. The net saving in new tax regime is Rs 75,000 which is equivalent to deduction threshold of Rs 2.18 lac at tax rate of 34.32%.
    Please make correction in your article.
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