In the Union Budget 2020, the Finance Minister has announced a new taxation regime for individual taxpayers on almost similar lines published for corporate taxpayers in September 2019. The scheme has been introduced with the objective of helping middle-income group taxpayers file their tax returns themselves or with the least possible professional assistance and documentation.
New Tax Rates
Under the new regime, income slabs for the tax rates have been increased to seven slabs, as against the previous four slabs. A brief comparison of the tax rates under the new and existing regime is given below:-
|Total income||Tax Rate|
|Old Regime||New Regime|
|Upto INR 2,50,000||0%||0%|
|From INR 2,50,001 to INR 5,00,000||5%||5%|
|From INR 5,00,001 to INR 7,50,000||20%||10%|
|From INR 7,50,001 to INR 10,00,000||20%||15%|
|From INR 10,00,001 to INR 12,50,000||30%||20%|
|From INR 12,50,001 to INR 15,00,000||30%||25%|
|Above INR 15,00,000||30%||30%|
From the face of it, the new regime appears to be attractive, but it comes with its limitations. Under the new scheme, taxpayers would not be entitled to claim most of the major deductions and exemptions, such as Leave Travel Allowance (LTA), House Rent Allowance (HRA), Standard Deduction, Medical Insurance Premium, Set-off of losses under house property, exemption on clubbing of minor's income, additional depreciation, 80-C deduction (EPF, insurance premium, housing loan principal repayment), savings interest deduction, donation, deduction on family pension, etc. However, deduction towards employer contribution to NPS and tax rebate under section 87A would continue.
Option to exercise by Individual / HUF
Individuals and HUFs not earning any business income can exercise the option every year at the time of filing the tax return. Flexibility is provided for switching between the two regimes every year (i.e., Year 1- Old Regime, Year 2- New Regime, Year 3- Old Regime, Year 4- New Regime).
However, those deriving business income, having availed an option, can withdraw from the same only once. In a case where they cease to have business income, the flexibility of choice of an option will be available every year.
Whether or not the new taxation regime would be more beneficial can be gauged from the illustration below. For our analysis, the impact under both the regimes has been considered under different scenarios i.e. for a salaried employee claiming HRA (Scenario 1), a salaried employee claiming deduction of interest on housing loan (Scenario 2) and a person having other sources income (Scenario 3).
Barring the changes mentioned above, deductions of INR 1.5 Lakhs i.e. 80C Deduction, INR 25,000 for mediclaim, and INR 10,000 i.e., 80TAA savings interest deduction have been kept constant under the old regime of taxation for all the above scenarios. At the same time, such deductions are not available under the new regime.
Amount in INR
|Particulars||Scenario 1||Scenario 2||Scenario 3|
|Housing Interest Deduction||-||-||(2,00,000)||-||-||-|
|Gross Total Income||11,60,000||15,10,000||12,60,000||15,10,000||15,10,000||15,10,000|
From the above tabulation, it may be inferred that the old regime of taxation would continue to be more beneficial for the taxpayers entitled to claim various deductions, especially high-value deductions such as HRA and housing interest. The new regime would be more helpful when there are no/few applicable deductions.
The new scheme seems to have been introduced with an objective for providing relief to taxpayers. However, it appears to be beneficial only for the taxpayers having minimal deductions/who have exhausted their house property losses, with a rider that their income is beyond a certain level. The scheme would also benefit senior citizens/pensioners, thereby enabling self-filling of tax returns, while they may also find the increased number of slabs to be more complex. Annual thorough comparative analysis before filing tax returns would be strongly advisable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.