Introduce new Section 115BAC in 2020 budget
In the 2020 budget, Finance Minister Nirmala Sitraman announced a new tax system to further reduce tariffs and tax rates. It has long been claimed by most taxpayers, but it took up the issue of removing all available exemptions and exemptions.
To add to this confusion, the finance minister gave taxpayers a choice between the new system of government and the existing government and left it up to them to decide which one to choose. Instead of simplifying tax laws by combining all of these factors, they are now more complex.
And if you are wondering how to make your decision, this blog answers that question. We look at the new system in detail, its advantages and compare it with the existing tax system
Current Tax System –
High rates but lots of options for tax cuts
The current tax system is complicated to say the least. When the tax rate is high, there are many ways to reduce your tax liability.
Over the years, the government has added more than a dozen exemptions and rebate options to Indian taxpayers by adding sections to the Income-tax Act, allowing them to reduce their taxable income and therefore pay less.
Discounts are part of your salary, such as home rent allowance (HRA) and leave travel allowance (LTA), discounts allow you to reduce your tax amount by investing, saving or spending on certain items. The largest section for discounts is Section 80C through which you can reduce your taxable income by 1.5 lakhs. In addition to these, there are several other categories that offer you discounts on everything from interest on your loans (home and education) to things in terms of premiums for health insurance.
|House Rent Allowance||Public Provident Fund|
|Leave Travel Allowance||ELSS (Equity Linked Saving Scheme)|
|Mobile and Internet Reimbursement||Employee Provident Fund|
|Food Coupons or Vouchers||Life Insurance Premium|
|Company Leased Car||Principal and Interest component of Home Loan|
|Standard Deduction||Children Tuition Fees|
|Uniform Allowance||Health Insurance Premiums|
|Leave Encashment||Investment in NPS|
|The tuition fee for Children|
|Saving Account Interest|
Download Automated Income Tax Revised Form 16 Part A&B for the Financial Year 2019-20 [ This Excel Utility can prepare at a time 50 Employees Form 16 Part A&B ]
The combination of exemptions and deduction can reduce your taxable income by millions. However, it also means looking for ways to optimize your salary and savings/investment each year so that you can keep your taxable income to a minimum.
Introduce new tax discipline – more slabs, lower tax rates but no way to reduce taxes
The new tax is different from the existing one.
First, under the new regime, the tax slab has increased, with the rate of sub-15 lakh being reduced. Second, all the concessions and concessions that taxpayers were using during the current regime will not be available in the new regime.
A comparison between the old and new tax slabs is given here
|Tax Slab(₹)||Old Tax Rates||New Tax Rates|
|0 – 2,50,000||0%||0%|
|2,50,000 – 5,00,000||5%||5%|
|5,00,000 – 7,50,000||20%||10%|
|7,50,000 – 10,00,000||20%||15%|
|10,00,000 – 12,50,000||30%||20%|
|12,50,000 – 15,00,000||30%||25%|
|15,00,000 & above||30%||30%|
Download Automated Income Tax Revised Form 16 Part B for the Financial Year 2019-20 [ This Excel Utility can prepare at a time 50 Employees Form 16 Part B ]
As you can see under the new system, income of Rs 5 lakh to Rs 5.5 lakh will be taxed at 10 per cent, while the income of Rs 7.5 lakh to Rs 10 lakh will be taxed at 15 per cent. It was 20 per cent flat over the full range of existing systems. Where the previous ten lakh slab where you paid 30 per cent will be divided into three parts at a rate of 20 per cent for 10-12.5 lakh rupees, 25 per cent for 12.5 lakh-15 lakh rupees and then 30 per cent for 15 rupees? Millions and more
So, which one should be picked?
Unfortunately, there is no single answer. And the culprit is again the complexity of Indian tax rules.
Although looking at tax rate reductions, the first reaction is that the new system looks better. However, with these cuts, someone earning Rs.5.5 lakh will have to pay Rs 25,000 and those earning Rs 10 lakh will have to save Rs 3,37,500 in tax. But as they say, the devil is in the details. For these savings, you will have to waive all discounts and rebates that may invalidate these benefits.
Determining which option to go with can be complicated if you look at it systematically.
Here you will find everything you want to do –
1. Calculate all the discounts you get: If you are living on rent, you are claiming HRA which is the highest salary discount. In addition to these, other tax-free elements include LTA, food bill, phone bill, etc. You will all be taxable if you want to relocate to the new tax system.
2. See the discounts you claim: As a salaried employee, the two deductions you automatically receive are the standard deduction of Rs. 50,000 and your contribution to your Employees Provident Fund (EPF). Under the new regime, you will not be able to claim this discount even if you contribute to the EPF. After all, you can’t claim a discount against your home loan (if you have one) or an insurance policy, which has helped reduce your taxable income so far.
Now, combine these discounts and discounts and subtract it from your salary to see what your taxable income is and what it will be like if you give up these discounts. You should decide which regime you should choose for.
Let’s take three examples in individual situations of how exemptions and exemptions or their lack will affect taxation in both systems.
Situation 1: Some people are demanding some discounts and discounts
Ramit is an employee of a bank who earns 8 lakh rupees a year. Being a salaried employee, he contributes to the EPF and also receives HRA benefits on his salary as a renter. In addition to these, he is eligible for LTA and he has spent Rs 25,000 on his trip this year and will claim it. He is unable to save anything beyond his EPF contribution due to family responsibilities.
Let’s see which tax system will save more tax for him