New tax regime will save you hassle, not money

NEW DELHI: Finance minister Nirmala Sitharaman on Saturday proposed to introduce new tax slabs with reduced rates for an annual income of up to Rs 15 lakh for those foregoing exemptions and deductions under a “simplified tax regime”. The new system is, however, optional and will co-exist with the old one with three slabs and various exemptions and deductions.

Sitharaman said those availing of deductions and exemptions might choose to go for status quo and pay tax as per the old regime. If you are a businessman and opt for the new regime, you can go back to the old system, but only once. However, for the salaried, there is no such restriction.

Sitharaman indicated that the government intended to remove all IT exemptions in the long run. She said the government had reviewed over 100 exemptions and deductions and removed around 70. “We will review and rationalise the remaining exemptions and deductions in the coming years with a view to further simplifying the tax system and lowering the tax rate,’’ she said.

However, a lowering of the tax rates isn’t a win-win for all taxpayers. Simply put, the “simplified” tax regime is not that simple. For an annual income of up to Rs 6 lakh, the tax liability under the new regime will be higher than that in the old system. This is because a standard deduction of Rs 50,000 allowed earlier is missing under the new regime. Therefore, the tax liability will be the same in both systems only up to an annual income of Rs 6 lakh. For other slabs, even the statutory savings under Employees’ Provident Fund and life-insurance buys make the old system attractive due to the exemptions.

For example, if X has a total income of Rs 7.5 lakh per annum (Rs 62,500 per month) with a monthly basic of Rs 40,000, his EPF deduction at the rate of 12% will be Rs 57,600.

Now, if X buys an insurance policy with an annual premium of Rs 17,400 -- taking his total savings and investments to Rs 75,000 per annum -- his tax liability after standard deduction of Rs 50,000 in the old system will be the same as that under the new regime. Further, if X claims tax benefits against school fees, mediclaim or a housing loan, he will be better off in the old system due to the deductions allowed.

Union Budget 2020: Full text of Nirmala Sitharaman's speech

The finance minister, in her speech, said a person earning Rs 15 lakh in a year and not availing of any deduction would pay only Rs 1,95,000 under the new regime compared with Rs 2,73,000 in the old system. Thus, his tax burden will be reduced by 78,000 under the new regime.

Sitharaman argued that the person would still be the gainer under the new regime even if he was taking a deduction of Rs 1.5 lakh under various sections of Chapter-VI-A of the Income-Tax Act in the old system. But if a taxpayer buys a house taking a home loan, or invests in pension funds and mediclaim, his tax liability will be lower in the old system. If he could avail of a deduction of more than Rs 2,50,000, the old system will be beneficial for him.

If a taxpayer in the highest tax bracket invests more than Rs 2.5 lakh in the allowed instruments under sections 24 (home loan), 80C (PF, insurance policy) and 80D (mediclaim), he will be better off sticking to the old system.

GOVT MATH DOESN’T FULLY ADD UP, SAY EXPERTS

Finance ministry has released calculations that show taxpayers could gain between 10,400 to 78,000 (annual taxable income 5 lakh to 15 lakh) a year if they move to the new no-exemption, no-deduction tax regime. Tax experts say the projected gains are exaggerated because they assume taxable income to remain the same once a taxpayer moves from the old system to the new. That can’t be. Under the new regime, taxable income will go up without any change in total income because all deductions and exemptions will become taxable. This will dilute the gains from lower rate and in some cases increase the tax liability.