Income Tax for FY 2020-21 AY 2021-22, Union budget,Go for exemption or not?
In a marathon Budget speech on 1 Feb 2020, Finance Minister, Nirmala Sitharaman, proposed to introduce simplified tax regime, new tax slabs with reduced rates for an annual income of up to Rs 15 lakh for those not taking exemptions and deductions. The new system is, however, optional and will co-exist with the old one with three slabs and various exemptions and deductions. How do you decide which one to pick? Dividend Distribution Tax (DDT) has been abolished and dividends will be taxed in hands of the recipient taxpayers at applicable slab rates. This article looks at Budget 2020 and changes proposed.
- Dividend Distribution Tax (DDT) has been abolished and dividends will be taxed in hands of the recipient taxpayers at applicable slab rates. TDS @ 10% will be applicable on dividend paid to an individual exceeding 5,000 during the year.
- Deposit insurance cover raised to Rs 5 lakh.
- Instead of the annual tax statement (Form 26AS) for taxpayers on the online tax portal, a more comprehensive annual financial statement which will capture multiple information such as sale/purchase of immovable property, share-based transactions, etc in addition to details of taxes deducted at source has been proposed. This will enable taxpayers to reconcile the details reported in their tax returns with the information already available with the tax authorities, thereby reducing litigation.
- ‘Vivaad se Vishwas’ Scheme to be introduced to settle pending income tax disputes where taxpayers can pay the amount of disputed tax (no interest or penalty) on or before March 31, 2020, and . Taxpayers can also pay tax under dispute by June 30, 2020 with some additional amount (expected to be lower than the penalty/interest exposure) under this scheme.
- Travelling abroad or making a foreign remittance under the Reserve Bank’s Liberalised Remittance Scheme (LRS). Tour operators/banks (authorised dealers) will collect tax at source of 5% from you. If you don’t furnish your PAN/Aadhaar, the tax to be collected will increase to 10%
- All income tax notices will be issued only in electronic mode. You may also receive intimation on your registered email ID. Do keep personal details like email id and mobile number updated on the income tax department’s portal for timely receipt of such notices.
- Employer’s contribution to provident fund, National Pension System and superannuation fund exceeding in aggregate 7.5 lakh per year to be taxed as salary in hands of the employee. Interest, dividend and other similar incomes arising on such excess contribution (exceeding 7.5 lakh) to be taxed as well. This will lead to additional tax liability, especially for high net worth individuals.
- Payment of tax on ESOPs received by employees of eligible startups to be deferred. Such tax is now payable on completion of five years from year of allotment of shares or sale of shares or cessation of employment, whichever is earlier. This will improve cash flow for employees. However, such benefits are only available for employees of eligible startups and not of all employers.
- For Homebuyers:
- No adjustments to the sale consideration on transfer of immovable property can be made where variation between stamp duty value and sale consideration is not more than 10% of latter (earlier 5%). This will reduce hardship to taxpayers for genuine transactions in real estate.
- Additional tax deduction of up to 1.5 lakh for interest on housing loan has been extended to loans sanctioned up to March 31, 2021 (earlier, March 31, 2020).
- Resident of India
- Budget 2020 proposes that if an individual who is a citizen of India or person of Indian origin visits India for 120 days or more in a financial year and had spent more than 365 days in last four years, then such an individual will also become ‘resident’ in India.
- NRI: ‘ordinarily resident
- Budget 2020 has proposed to hike the number of years required of being a resident by an individual to qualify as ‘ordinarily resident’ from at least two years currently to at least four years out of the previous 10 years. This would make the ‘not ordinarily’ resident to ‘ordinarily resident’ easily if he was resident individual in four years out of the 10 previous years.
- Currently, as per income tax laws, an individual qualifies as a resident individual if he/she stays for more than 182 days in the country.
- Details of the eligible donation under Section 80G will be pre-filled in the income tax returns on the basis the information submitted by the donee (charitable institution). There is a possibility of claims being disallowed if the proper details of donations are not submitted.
- The Budget also impacts you through higher customs duties on a whole range of imported products, from footwear to electronics, furniture, wall fans, kitchenware, as well as some alcoholic beverages. All of these could get costlier.
Income Tax Slabs in Budget 2020-21
Finance Minister, Nirmala Sitharaman, proposed to introduce simplified tax regime, new tax slabs with reduced rates for an annual income of up to Rs 15 lakh for those not taking exemptions and deductions. The new system is, however, optional and will co-exist with the old one with three slabs and various exemptions and deductions. It is an effort to provide relief and simplicity to taxpayers, particularly those at lower and middle-income levels.
The tax structure has been rejigged with the introduction of four thinly-sliced tax slabs between Rs 5 lakh and Rs 15 lakhs. from 20% to 10% between Rs 5 lakh and Rs 7.5 lakh, from 20% to 15% in the Rs 7.5 lakh-Rs 10 lakh bracket, from 30% to 20% for Rs 10 lakh-Rs 12.5 lakh and from 30% to 25% between Rs 12.5 lakh and Rs 15 lakh.
The FM in her speech said this would lead to “substantial tax benefit” and gave the example of a person earning Rs 15 lakh and not using any exemptions now will pay only Rs 1.95 lakh of tax, as compared to Rs 2.73 lakh — a saving of Rs 78,000. This optional scheme, the FM said, is estimated to cost the exchequer Rs 40,000 crore a year in foregone I-T revenues.
Those availing of deductions and exemptions might choose to go for status quo i.e old way and pay tax as per the old regime. What the speech did not spell out, but the Budget documents did, is that the option to choose the new scheme would be reversible for those who do not have any business income. 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
List of Deductions removed
Let’s look at the list of exemptions and deductions that go out if you opt for the new regime:
- Standard Deduction of Rs 50,000
- Leave Travel Concession
- House Rent Allowance(HRA)
- Food vouchers of Rs 50/meal
- Deduction under Section 80C i.e. equity linked savings scheme (ELSS), provident fund (PF), insurance premium, school fees, and principal repayment on housing loan
- Interest on housing loan
- 80CCC (contribution towards certain pension fund),
- Section 80D (health insurance),
- 80E (interest on loan for higher education),
- 80EE (interest on loan taken for residential property),
- 80EEB (purchase of electric vehicle): Deduction on Auto Loan interest for purchase of electric vehicle Up to Rs 1.5 lakh
- 80EEA: Additional deduction on Home Loan interest on affordable houses u/s 80EEA – Up to Rs 1.5 lakh
- 80G (donation to charitable institutions),
- 80GG (rent paid).
- Tax rebate u/s 87A – Up to Rs 12,500 on taxable income up to Rs 5 lakh
- Deduction on Home Loan interest – Up to Rs 2 lakh
Apart from the above, the following two deductions introduced last year are also to be scrapped under new tax regime:
Except tax benefit on HRA, by fully availing all deductions, a salaried employee under old regime may end up paying no tax on gross salary of up to Rs 13.25 lakh (after HRA benefit), assuming he has no other source of income.
However, deductions such as per diems (daily allowance on travel) and employer’s contribution to National Pension System are still available
With or Without Exemptions which Tax System to choose?
The answer to the question above depends on your level of income, whether you use tax-saving investments, and if so, to what extent. For incomes up to Rs 15 lakh, you do get a lower tax rate, but this means you cannot avail of deductions and exemptions, ranging from HRA and standard deduction to those for investments under section 80C or medical insurance premium under Section 80D. That clearly involves a trade-off. Pensioners and new entrants to the job market, who have no investments in tax-saving schemes or HRA and LTA benefits may gain under the new tax regime.
Case I—Salaried individual not claiming any exemptions or deductions
|Gross salary income level||Tax payable in Existing Regime||Tax payable in New Regime||Additional tax saving/ (payable)|
|Claiming no exemptions|
|At 7.5 lakh||54,600||39,000||15,600|
|At 10 lakh||1,06,600||78,000||28,600|
|At 12.5 lakh||1,79,400||1,30,000||49,400|
|At 15 lakh||2,57,400||1,95,000||62,400|
|At 20 lakh||4,13,400||3,51,000||62,400|
Case II— Salaried individual claiming most common deduction/exemptions, i.e. under sections 80C, 80D and standard deduction
Assuming the individual is claiming these tax breaks: standard deduction of Rs 50,000, deduction of Rs 1.5 lakh under section 80C and Rs 25,000 under section 80D for medical premium. In this case, if the individual opts for the new personal tax regime then at gross salary of Rs 7.5 lakh the person will have to pay Rs 20,800 extra tax, at a gross salary of Rs 12.5 lakh the additional tax payable will be Rs 5,200. However, at a gross salary level of Rs 15 lakh or above the individual will save tax of Rs 7800.
|Gross salary income level||Tax payable in existing regime||Tax payable in new regime||Additional tax saving/ (payable)|
|Claiming: 1.25 lakh in exemptions|
standard deduction of Rs 50,000, deduction of Rs 1.5 lakh under section 80C and Rs 25,000 under section 80D for medical premium.
|At 7.5 lakh||18,200||39,000||(20,800)|
|At 10 lakh||70,200||78,000||(7,800)|
|At 12.5 lakh||1,24,800||1,30,000||(5,200)|
|At 15 lakh||2,02,800||1,95,000||7,800|
|At 20 lakh||3,58,800||3,51,000||7,800|
Case III— Salaried individual claiming more exemptions/deduction, i.e. under sections 80C, 80D, standard deduction and HRA exemption
Assuming the individual is claiming these tax breaks: standard deduction of Rs 50,000, deduction of Rs 1.5 lakh under section 80C and Rs 25,000 under section 80D for medical premium and HRA exemption (varied as per salary income level). In this case if the individual opts for the new personal tax regime then at gross salary of Rs 7.5 lakh (claiming HRA exemption of INR 150,000) the person will have to pay Rs 39,000 extra tax, at a gross salary of Rs 10 lakh (claiming HRA exemption of INR 200,000) the additional tax payable will be Rs 49,400, at a gross salary of Rs 12.5 lakh (claiming HRA exemption of INR 250,000) the additional tax payable will be Rs 59,800, at a gross salary of Rs 15 lakh (claiming HRA exemption of INR 300,000) the additional tax payable will be Rs 83,200 and at a gross salary level of Rs 20 lakh (claiming HRA exemption of INR 400,000) the additional tax payable will be Rs 117,000.
|Gross salary income level||HRA claimed||Tax payable in Existing Regime||Tax payable in New Regime||Additional tax saving/ (payable)|
|Claiming: 1.25 lakh in exemption + HRA(varied as per salary income level)|
Standard deduction of Rs 50,000, deduction of Rs 1.5 lakh under section 80C and Rs 25,000 under section 80D for medical premium and HRA exemption
|At 7.5 lakhs||150,000||–||39,000||(39,000)|
|At 10 lakhs||200,000||28,600||78,000||(49,400)|
|At 12.5 lakhs||250,000||70,200||1,30,000||(59,800)|
|At 15 lakhs||300,000||1,11,800||1,95,000||(83,200)|
|At 20 lakhs||400,000||2,34,000||3,51,000||(1,17,000)|
For instance, income between Rs 5 lakh and Rs 7.5 lakh annually will be taxed at 10% in the new regime instead of the 20% you would pay under the current scheme (which continues as an option). If you have an annual income of Rs 7.5 lakh, this translates into a saving of Rs 25,000 in tax. Add the cess of 4% and you get a total saving of Rs 26,000. However, this is possible only if you are not claiming any deductions or exemptions. If you are claiming Rs 1.25 lakh or more as deductions or exemptions, say for standard deduction (flat Rs 50,000 is allowed) plus other deductions under Section 80C — say for PF, LIC premium or home loan interest — then it is best to continue under the current regime because the gain will be more than offset by the addition to taxable income.
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 one 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.
- if one 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.
If you have an annual income of Rs 10 lakh, this translates into a saving of Rs 39,000 – assuming that you haven’t claimed any deductions or exemptions. But, typically an individual would avail of a standard deduction and have some investments. So, if you are claiming Rs 1.87 lakh or more as deductions/exemptions, again, it is best not to switch.