Income Tax

New Income Tax Regime – Structural Shift in Taxation under Income Tax Act as per the Budget 2020, Structural Shift in Taxation under Income Tax Act as per the Budget 2020 Where you Opt in Old or New? | Tax Guru Indian

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Honorable Finance Minister (FM) Nirmala Sitaraman in her budget has introduced a new taxation regime under personal taxation. Instead of giving relief to all the Individual & HUF by increasing the tax slabs directly, Budget 2020 have proposed to introduce new section 115BAC in the Income Tax Act 1961 in which Individuals or HUF have been given an option to give up various exemptions and get advantage of lower tax rates. Following is the comparison of the existing tax rates and the new tax slabs. 

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INCOMES(In Rs)                OLD RATE (IN %)                   NEW RATES
(IN%)

Upto Rs 2,50,000                                NIL
                                        NIL

RS 2,50,001 to Rs 5,00,000               
5                                             5                     

Rs 5,00,001 to Rs 7,50,000                20                                           10

Rs 7,50,001 to Rs 10,00,000              20
                                           15

Rs 10,00,001 to Rs 12,50,000            30                                            20

Rs 12,50,001 to Rs 15,00,000            30                                            25

Above Rs 15,00,000                           30                                            30

Income Tax Slab for F.Y. 2020-21

Therefore, the new taxation regime, Assessee shall have to decide every year whether to continue with the old tax system or choose the newer tax system. He shall have to calculate how much benefit he will get under the existing tax system with all deductions & exemptions against the reduction in tax liability under the new tax system by forgoing various deductions & exemptions. It’s too much to expect from a normal assessee to make such complex calculations himself and make a decision. New tax regime has increased the complexity instead of simplifying it. words, the example given by the honorable FM of a person earning Rs 15 lakhs per annum and highlighting a major tax saving of Rs 78,000 by comparing the tax liability under both existing tax system and newer tax regime with assumption that the assessee do not avail any deductions and exemption. However, the assumption has itself a big flaw. Out of all the 4.86 crore returns filed by the Individuals &Huf for the FY 19-20 till January 2020, there will be an extremely minuscule number of Assessees who might not have claimed any deduction or exemptions in any form in their income tax returns. Many deductions are mandated by the statute e.g Contribution to Provident Funds by the employee. However, many of the deductions/exemptions are claimed by the assessee for the expenses they will have to incur for their livelihood eg. paying rent and claiming HRA (in case of salary) or claiming deduction u/s section 80GGA in case of other assessee. Almost all the assessee shall have at least one account in Saving Bank in which assessee will earn an interest and claim deduction u/s 80TTA. Hence some of the deductions /exemptions claimed by the assessee are actually for the expenses which are either mandated by some other statute or they have to be incurred for the livelihood. For instance, we can say that some deductions/exemptions are not optional but necessary. Let us understand the new tax regime with an illustration and also compare it with the existing tax system. Mr X is employed with ABC Limited. Above all, the salary structure for the FY 2020-21 is as under: Particulars Amount(Rs) Basic 6,21,000 HRA 3,10,500 Special Allowance 2,58,000 Total Salary 11,89,500 Professional Tax 2,400 Employees Contribution to Provident Fund 74,520 Mr X also invested Rs 60,000 in Tax Saving Mutual Funds and pay insurance premium of Rs 14,000, medical insurance premium of Rs 19,000. He pays rent of Rs 25,000 pm He also earns interest of Rs 5,500 on balance in saving bank account. Mr X has also availed Housing Loan of Rs 50,00,000 on which he paid Rs 1,25,000 as interest and Rs 65,500 as principal amount. Calculation of Tax under both Tax Regimes: Particulars As per Existing Tax Regime As per New Tax Regime Salary Total Salary 11,89,500 11,89,500 Less : HRA (2,37,900) Not Allowed Professional Tax (2,400) Not Allowed Standard Deduction (50,000) Not Allowed Net Taxable Salary(A) 8,92,200 11,89,500 House Property Rent income 0 0 Less : Interest on Loan 1,25,000 Not Allowed Net Income (1,25,000) 0 Income from Other Sources Interest on saving bank account 5,500 5,500 Total IFOS Income (C) 5,500 5,500 Gross Total Income(A+B+C) 7,79,700 11,95,000 Less: Deductions 80C: Contribution to Provident Fund 74,250 Not available Investment in Tax Saving Mutual Funds 60,000 Not available Principal Portion of Housing loan installment 65,500 Not available Total deduction u/s 80C(Restricted) (A) 1,50,000 Not available 80D Medical Insurance Premium (B) 19,000 Not Available 80TTA: Interest on Saving Bank Interest(C) 5,500 Not Available Total Deductions (A+B+C) (174500) 0 Net Taxable Income 6,05,200 11,95,000 Tax Amount 33,540 1,14,000 Less : Rebate u/s 87A 0 0 Add Health & Education [email protected]% 1,342 4,560 Total Tax liability 34,882 1,18,560 Based on the above example, we can clearly see that the new tax regime is not beneficial to the assessee as he has to pay Rs 1,18,560 as tax while if he decides to remain under the existing tax regime, he would not have only Rs 34,882. Thus, there will be extra tax payout of Rs 83,678. Pros of New Income Tax Regime: 1) There are chances that people will stop buying insurance policies at the end of the financial year just for the purpose of saving tax. 2) Millennial’s will be the most beneficiary of the new tax regime as they dont have a tendency to save and invest. With lower tax on their income, they will have higher disposable income and they will increase the consumption in the economy. Cons of the New Tax Regime:

1) India is a country where the government does not sponsor social security to its citizens. There are few schemes by the government where free healthcare benefits, subsidized housing benefits and pension benefits are available to the residents of our country but there is a lack of fully developed social security mechanism in India unlike developed countries in the world. Hence people have to save and invest on their own for their retirement. Various deductions under section 80C and section 80D motivates and incentives people to invest by giving tax benefits. However, under the new tax regime, with no incentive to save and invest for retirement, there are chances that people, especially the younger generation, shall not save for retirement and start spending recklessly and will not be able to build sufficient retirement corpus and will end up zero savings in future.

2) The Government of India has a very ambitious dream of Housing for All till 2022 under PradhanMantri Awas Yojana. To accomplish this dream, the government is giving subsidy to first time home-buyers. However, the government has taken a contrarian stand under new tax regime by not allowing deduction of Interest on Housing Loan u/s 24(b) and principal portion of housing loan under section 80C, or stamp duty payment under section 80C. Such provisions will be a roadblock for the government’s ambitious dream.

3) In order to incentivise the purchase of the electric vehicle by an individual, the government in its Budget 2019, introduced section 80EEB in which individuals can claim deduction of Interest Payment upto Rs 1,50,000 on loan taken for buying electric vehicles. But in the new tax regime, In addition, assessee will not be able to claim this deduction. This will be a roadblock for the government’s efforts to push clean energy and incentivise electric vehicles.

4) After that, Government has also dis-incentivized the manufacturing activities undertaken by the individuals /Huf specially MSME units by not allowing additional depreciation under section 32(1)(iia) & deductions under section 35AD under the new tax regime. This will dis-incentivize new investments and expansions plans of the MSME sectors and indirectly affect job creation. We all know that msme is the key job creator in our country.

5) Similarly, the new tax regime will be a big headache for the employers as their employees will have the option to choose one of the tax systems. The calculation of TDS will be more tedious as there is no clarity from the government regarding how and when the declaration shall be taken from employees who want to opt for a new tax regime.

6) Individual and HUF with business and/or profession income have not been given the option to choose the new tax regime for every previous year unlike other assessee. There was no such need to differentiate between assessee for the new tax regime. Who will opt for New Tax Regime:

1) Millennials who generally don’t save and invest will be the biggest beneficiary of the new tax regime.

2) Young Assessee who have started earning recently and whose insurance policies and other tax saving investments are taken care by their parents . 3) Assessee whose are in high tax bracket but do not have investments options and other tax saving liabilities e.g. existing Home Loans, HRA etc

4) Employees who are earning higher salaries and their employers are not liable for registration under EPF Act

5) Assessee who is not into manufacturing business where he does not have an option to claim additional depreciation u/s 32(iia). Suggestion to the government for making changes in the new tax regime to make it more practical and attractive. 

1) The Government has tried to implement the tax regime as suggested in the DTC code report submitted to the government in August 2019 which suggested substantial changes in tax slabs and lower tax rates and New Tax slabs suggested as under :

PARTICULARS                                         
                              AMOUNT (Rs)

Basic                                                                                                   6,21,000

HRA                                                                                                   3,10,500

Special Allowance                                                                              2,58,000

Total Salary                                                                                         11,89,500

Professional Tax                                                                                  2,400

Employees Contribution to Provident Fund                                       74,520

Mr X also invested Rs 60,000 in Tax Saving Mutual Funds and pay insurance premium of Rs 14,000, medical insurance premium of Rs 19,000. He pays rent of Rs 25,000 pm He also earns interest of Rs 5,500 on balance in saving bank account. Mr X has also availed Housing Loan of Rs 50,00,000 on which he paid Rs 1,25,000 as interest and Rs 65,500 as principal amount. Calculation of Tax under both Tax Regimes:

Particulars
                As per Existing Tax Regime               As
per New Tax Regime

Salary

Total Salary                                         11,89,500
                               11,89,500

Less :

HRA                                                   (2,37,900)
                               Not Allowed

Professional Tax                                  (2,400)
                                    Not
Allowed

Standard Deduction                           (50,000)
                                  Not
Allowed

Net Taxable Salary(A)                       
8,92,200                                 11,89,500

House Property

Rent income                                                    0
                                    0

Less :

Interest on Loan                                  1,25,000
                                 Not
Allowed

Net Income                                         (1,25,000)
                                  0

Income from Other Sources

Interest on saving bank account         5,500                                       5,500

Total IFOS Income (C)                       5,500
                                      5,500

Gross Total Income(A+B+C)             7,79,700
                                 11,95,000

Less: Deductions 80C:

Contribution to Provident Fund         74,250                                     Not
available

Investment in Tax Saving Mutual Funds 60,000                                Not available

Principal Portion of Housing loan installment 65,500                        Not available

Total deduction u/s 80C(Restricted) (A) 1,50,000                             Not available

80D Medical Insurance Premium (B) 19,000                                     Not
Available

80TTA: Interest on Saving Bank Interest(C) 5,500                           Not Available

Total Deductions (A+B+C)                            (174500)
                                 0

Net Taxable Income                            6,05,200
                                 11,95,000

Tax Amount                                        33,540
                                    1,14,000

Less :

Applicable if the Net Taxable Income  less than Rs. 5,00,000/-

 

Rebate u/s 87A                                               0
                                         0 (Not Applicable)

      (Applicable if the Net Taxable Income
less than Rs. 5,00,000/-)

Add Health & Education [email protected]% 1,342                                        4,560

Total Tax liability                                34,882                                     1,18,560

In conclusion, based on the above example, we can clearly see that the new tax regime is not beneficial to the assessee as he has to pay Rs 1,18,560 as tax while if he decides to remain under the existing tax regime, he would not have only Rs 34,882. Thus, there will be extra tax payout of Rs 83,678.


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