The new income tax discipline came into effect on April 1, 2020. It gives an individual the option to continue with existing tax duties (with tax rebates and exemptions) or to opt for the 70 new tax rebates and tax exemptions. For the convenience of salaried persons who have no business income, they have to choose between the existing and new tax system every financial year.
On the other hand, those who have business income should carefully evaluate whether they want to continue the existing tax discipline or choose the new one. This is because once they choose the new tax system, they can return to the existing tax system once in a lifetime.
To choose between two tax structures, it is important that you know how much your tax liability falls under both rules.
Under the new tax, a person is only eligible for a waiver under section 80CCD (2). This section allows the employer’s contribution to the NPS account to be deducted for a maximum of 10 per cent of the employee’s salary (here the salary means basic additional value-added allowance).
Other commonly available exemptions such as Section 80C, 80D, etc., and tax exemptions such as HRA, LTA, etc. are not available in the new tax structure.
This can be explained by an example of the income tax liability that you have under the new tax. Suppose your total income in the financial year 2000-2011 is 1 lakh rupees. In addition, your employer has contributed Rs.60,000 to your NPS account during the year, which is eligible for exemption under Section 80CCD (2). Therefore, your net taxable income will be Rs. 15,40,000 (Rs. 16 lakh minus Rs. 60,000).
In the new tax the system, the income tax liability will be calculated at Rs 15.40 lakh. There will be no tax on the first two and a half lakh rupees from the above mentioned 15.40 lakh rupees. Now the income that still has to be taxed will be Rs 12.90 lakh (15.40 lakh minus Rs 2.5 lakh).
From the next Rs 2.99 lakh mentioned in the second phase of the table above, the next two and a half lakh rupees (two and a half lakh rupees under the exemption certificate) will be taxed at five per cent. The tax amount here will be Rs 12,500.
The applicable income for tax will be Rs. 10,40,000. The next two and a half lakh rupees (.5.5 lakh minus five lakh rupees) will be levied on the ten per cent tax as mentioned in the 3rd clause. The amount of tax comes out to Rs 25,000.
Adding tax liability from points 1, 2 and 3, at the moment, the total tax liability comes to Rs 37,500 (0 12,500 25,000).
At the moment, the tax that is still taxable is Rs 7,90,000. From the 4th point, two and a half lakh rupees (minus one lakh rupees Rs. 5 lakh) will be 15 per cent and the tax liability will be 3,500 rupees.
After the fifth point, the amount of taxable income is Rs 5,40,000. From the fifth point, the next two and a half lakh rupees (12.5 lakh minus 10 lakh rupees) will be taxed at 20 per cent. The duty liability comes out as Rs 50,000.
The remaining amount of tax income is Rs. 2,90,000. As mentioned in the point clause, Rs 2.5 lakh (minus Rs 12.5 lakh) will be taxed at 25 per cent. The tax liability will be Rs 62,500
Only Rs 40,000 is left which is still taxed. As mentioned in the table above, from point M it will be taxed at 30 per cent. Tax liability will be Rs 12,000
The new tax comes out as a total tax liability of Rs 1,99,500 (0 12,500 25,000 37,500 50,000 62,500 12,000). Health and education will be added at a rate of 4 per cent. The amount of cess is Rs 7,980.
Thus, the total tax liability under the new tax system will be Rs 2,07,480.
Now you need to compare it with the tax liability under your existing tax. The calculation of income tax under the existing tax duty works in the same way. First, you must deduct all tax deductions and deductions that you are entitled to from your total income, and then calculate your tax liability on net taxable income. Click here to read more about it.
Another way to compare the new and existing tax systems is to have the same tax liability in both tax systems so as to examine how many exemptions and/or tax exemptions are required.
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