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Budget 2020 – An analysis of the new tax regime

The budget of 2020, announced on 1 February 2020, for the first time has given taxpayers an option to choose how much tax they would want to pay. That means a taxpayer can choose to invest and pay tax on reduced income or not invest and pay a lower tax on the actual income earned. Thus, the onus of choice is on the taxpayer.

Please note: These changes are applicable for the financial year 2020-2021. Here financial year means, the period between 1 April 2020, to 31 March 2021.

Here are a few pointers that will help you make your one-time choice.

New tax rules

As per the new optional income tax regime, the revised tax rates for the new income slabs are:

Income slabs Tax rate
Upto INR 2,50,000 Nil
INR 2,50,000 – INR 5,00,000 5%
INR 5,00,000 – INR 7.50,000 10%
INR 7,50,000 – INR 10,00,000 15%
INR 10,00,000 – INR 12,50,000 20%
INR 12,50,000 – INR 15,00,000 25%
INR 15,00,000 and above 30%

A taxpayer can opt to pay tax at these slashed rates if they are ready to forgo deductions like:

  1. Leave travel concession
  2. House rent allowance
  3. Special allowance u/s 10(14);
  4. Allowances to MPs/MLAs u/s
  5. Allowance for the income of minor
  6. Standard deduction of INR 50,000
  7. Entertainment allowance
  8. Professional tax
  9. Loss under the head ‘Income from House Property’
  10. Deduction from family pension
  11. Exemption in respect of free food and beverage through vouchers provided to the employee,
  12. Any deduction under chapter VIA – This includes the deductions for life insurance premium paid, provident fund contributions, investments in tax saving funds, interest on housing and education loan, principal amount paid on housing loan, donations, house rent paid when HRA is not available, medical insurance premium paid and more.

However, deduction under sub-section (2) of section 80CCD (employer contribution on account of the employee in notified pension scheme) and section 80JJAA (for new employment) can still be claimed.

Furthermore, the following allowances are still available under the new tax regime:

  1. Transport Allowance granted to a divyang (person with a disability) employee to meet the expenditure to commute between the place of residence and place of duty
  2. Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office;
  3. Any Allowance granted to meet the cost of travel on tour or on transfer;
  4. Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.
  5. Like in the old tax regime, a taxpayer can claim the rebate u/s 87A (up to INR 12,500) if the annual taxable income is less than INR 5,00,000.

That means, if a taxpayer earns income less than or equal to INR 5,00,000, it doesn’t matter which tax regime is chosen. As per the old and new tax rates, the tax payable will be ‘0’.

  1. Gifts received from the employer up to INR 5,000 remains exempted under both – new and existing tax regime.

Old tax rules

Keeping human behaviour of resistance for change in mind, the Finance Minister has given an option to every taxpayer to opt for getting taxed at the old tax rates. The tax rates applicable for a taxpayer less than 60 years of age are::

Income slabs Tax rate
Upto INR 2,50,000 Nil
INR 2,50,000 – INR 5,00,000 5%
INR 5,00,000 – INR 10.00,000 20%
INR 10,00,000 and above 30%

However, though these optional tax rates are higher than those proposed in Budget 2020, the taxpayer can claim various deductions and get exemptions here. Most common being the HRA, standard deduction, Chapter VI A deductions, tax-free perquisites and more.

That means, a regular salaried employee not receiving HRA can reduce his/her total taxable income by INR 3,11,400 as follows:

Deduction The maximum amount available as a deduction
Standard deduction INR 50,000
Tax-free perquisite – Food and beverage INR 26,400*
Section 80C INR 1,50,000
Section 80D INR 25,000
Section 80GG INR 60,000

*Tax-free perquisite – Food and beverage: Assuming a 22 day month, and 2 meals a day.

Comparison between the old and the new tax regime for salaried individuals

Based on the above pointers here are few comparisons to understand the effect of the tax regime better.

Profile 1 – You are a salaried individual having no investments and are not claiming HRA or any deductions.

As mentioned earlier, if your income is INR 5,00,000 or less, your choice of the tax regime doesn’t matter. However, for any income more than INR 5,00,000, the new tax regime is suitable. Despite the available standard deduction, the reduced tax rates in the new regime are more beneficial.

Please note: If you opt for the new regime now and your income crosses INR 5 lakhs in the future, you will not be able to switch to the old tax regime as of now. In other words, you will lose the advantage of the old regime perpetually.

Profile 2 – You are a salaried individual having no investments but are claiming HRA

Contrary to the above, just by claiming HRA and the standard deduction, the old tax regime helps you save more tax.

*Here HRA is calculated at 40% of the half of basic pay. Basic pay is taken as 50% of the gross salary.

Profile 3 – You are a salaried individual investing or claiming deductions of a minimum of INR 1,50,000 every year. (Here you can assume that you are claiming HRA and investing or just investing)

In this case, the old tax regime is suitable. However, if you are earning anything more than INR 15,40,000 deductions of just INR 1,50,000 won’t help. That means if your taxable salary income is more than INR 15,40,000, the new tax regime is suitable for you.

Profile 4 – Minimum investments/deductions needed to save tax. (When we say investments and deductions, this can be divided between, HRA, tax-free perquisites, deductions under chapter VIA – LIC, investments in tax-free avenues, interests and principal repaid of house loan, interest on education loan and more. This is possible only under the old regime.)

Maximum Gross salary (Based on tax slabs) *Minimum investment/deduction needed

(Standard deduction+PT is separate)

INR 5,00,000 <No difference>
INR 7,50,000 INR 50,000
INR 10,00,000 INR 90,000
INR 12,50,000 INR 1,15,000
INR 15,00,000 INR 1,40,000
INR 20,00,000 INR 3,00,000

*Please note: The figures and calculations above are not to be considered as advice. They are illustrative.

Analysis – When to switch to the new tax regime and when not!

The analysis here is simple. Our experts say,  if you are a salaried individual and have a minimum of the above-mentioned deductions/investments to claim, the old tax regime is a better choice for you. Moreover, you can also discuss with your employer/HR to structure your salary with tax-free perquisites to help you save more on taxes. Usually, at the beginning of the financial year itself, one would know the basic deductions he/she can claim, tax-free perquisites available and then, plan his/her investments wisely. Investing for a secured future has never been a bad idea!

Furthermore, opting in for the new tax regime can be done anytime before filing the income tax return.

Please Note: Once you opt-in for the new tax regime, you cannot switch back to the old regime as of now.