All about the new income tax slabs and rates

For the first time ever, the Union budget 2020 presented by the Finance Minister came up with two tax slabs and rates and gave an option to the taxpayers to choose between the two from the financial year 2020-21.

While retaining the existing three slab tax rates, it introduced a new six-slab tax rate. On the
budget day, as news started trickling in on the tax front, the initial euphoria evaporated and gave rise to confusion and disappointment. The confusion was reinforced when I got a call from one of my colleagues recently, asking me which regime was beneficial as it was the time for the annual investment declaration in the organisation.

Old or New? Taxes, deductions, exemptions and compliances are by themselves something of a rocket science for the average taxpayer. The new rules have only added to the mystery surrounding income tax. So let us try to figure out which tax regime is better.

The table (for taxpayers who are less than 60 years of age) compares the tax slabs & rates between the old and the new tax structure.

The system that we follow in India is a progressive tax system meaning the more an individual earns the more taxes he is expected to pay. There is no change in the exemption limit of Rs 2.50 lakh and the tax rate of 5 % for taxable income up to Rs 5 lakh. The good news also is that individuals with taxable income up to Rs 5 lakh can claim tax rebate of Rs 12,500 under section 87A in both the old and new tax regimes. Effectively, this means that individual taxpayers having taxable income up to Rs 5 lakh need not pay any tax.

What is the difference between the old and new other than the tax slabs & tax rates?
If you opt for the new regime, the bad news is you will have to forego 70 deductions and exemptions:

Some of them are given below:
1. Standard deduction: Rs 50,000( claimed only by salaried class & pensioners)
2. House rent allowance
3. Housing loan interest of Rs 2 lakh u/s 24 of IT Act
4. Deductions under Sec 80C of up to Rs 1.5 lakh (which includes the popular LI Premiums, ELSS, EPF and PPF contributions etc)
5. Leave travel allowance: Tax free if claimed once in block of two years
NPS contribution of Rs 50,000
6. Premium paid on a mediclaim policy up to Rs 25,000 and Rs 50,000 for parents and senior
citizens)
7. Savings bank interest of Rs 10,000 under Sec 80TTA
8. Interest income (for senior citizens) of Rs 50,000 under Sec 80TTB
9. Donations made to charitable institutions under Section 80G

Incidentally, taxpayers will have the option of choosing any one of the structures every year. If a
taxpayer has made certain investments and has home loan EMIs, he is better off in the old regime. However, business owners or self-employed persons do not have the option to switch back and forth every year.

The Union budget has left the surcharge on tax untouched. Individual taxpayers with a taxable income above Rs 50 lakh will pay 10% surcharge on the tax liability.

The surcharge goes up to 15% for income between Rs 1 crore and Rs 2 crore, 25% for income between Rs 2 crore and Rs 5 crore and 37% for income above Rs 5 crore.

Which is better? Some examples

If you are a salaried employee below 60 years of age earning Rs 8 lakh per annum and claim a total deduction of Rs 2 lakh (standard deduction of Rs 50,000 and Sec 80 C benefits of Rs 1,50,000) then your Tax liability will be Rs 46,800 under the new regime and Rs 33,800 under the old regime. You can save Rs 13,000 if you opt for the old regime.

In the above example if you were a self-employed person then your tax liability will be Rs 46,800 under the new regime and Rs 44,200 under the old regime and you save a mere Rs 2,600 as you cannot claim standard deduction of Rs 50,000.

You are better off in the old regime if you are a salaried employee with annual income of less than Rs 12 lakh. The savings in tax will be substantial if you are claiming deductions of home loan interest, premium on Mediclaim and contributions to NPS.

Whatever the case, just go to the following website https://www.incometaxindiaefiling.gov.in/home and click on the tax calculator FY2020-21.You can view the tax payable under both the regimes and the benefits that you get. Experts are of the opinion that the new tax regime by making compliance easy discourages savings and encourages spending.

(The writer is a CFA and a former Banker and is currently with Manipal Academy of

Banking, Bengaluru)