Tuesday, November 24, 2020
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Budget 2020: Dual tax regime, a complicated tax structure that may require professional help

An ideal situation would have been to remove exemptions and deductions and have same simplified system for everyone. 

Finance Minister Nirmala Sitharaman today announced a new dual regime of taxation for individuals and HUF (Hindu Undivided Family). This is first time in Income tax where such dual regime would be applicable. 

The purpose of this is simplification of Income tax and removal of exemption and deductions. There were many direct tax committees who had suggested this in past. However, this seems to be a complicated tax structure which requires professional help for each different scenario with lots of test and eligibility checks.

I have analysed some of the aspect of this below:

Tax slabs:

Different Slab rates for individuals less than 60 years of age in pursuance of the Budget 2020 is as follows:

Income

Old Regime

New Regime

Below 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 15,00,000

30%

30%

For age above 60 and upto 80 years and for age above 80 years separate slabs under old regime would be applicable. 

Eligibility and income criterion for choosing: 

Particulars Person not having Business Income Person having Business Income
Frequency of Option switching Can avail this option each year.

Can only opt in or out such option only once. Meaning once you choose this and then decide to opt out then cannot opt in again ever.

Implications

Need to keep check each year. Hence, this will lead to additional compliance cost to such person. Being flexible condition tax management will be easier but lead to additional expenditure on compliance to keep yearly check.

No need to keep check each year but an incorrect decision may lead to additional tax payment each year. Being rigid condition, this may lead to additional tax payment.

Change of Status A person started earning business income need to again make a decision.

A person no more having business income need to again make a decision.

Presumptive Taxation Not applicable

Decision on presumptive taxation option to be taken separately

Depreciation Not applicable

If opted for new regime with presumptive taxation then no depreciation allowed.

If opted for new regime without presumptive tax then depreciation allowed but additional depreciation not allowed.

 

Deductions and exemption to be foregone:

Person will have to forego many exemptions/deductions if they choose to pay tax under new system.

Major such exemptions or deductions are listed below:-

    1. Standard deduction for salary of Rs. 50,000
    2. Deduction 80C i.e. ELSS, PF, Insurance premium, School fees, principal repayment on housing loan, etc upto Rs. 1,50,000
    3. Interest on housing loan for self-occupied property or vacant property upto Rs. 2,00,000
    4. loss will not be allowed under house property income
    5. Carry forward of past losses including depreciation will not be allowed.
    6. Mediclaim premium and expenses on medical expenses (Sections 80D and 80DDB, etc)
    7. Interest on education loan under section 80E
    8. Deduction for donations made charitable and other institutions (Section 80G)
    9. Leave travel concession (Section 10(5))
    10. House rent allowance (HRA) (Section 10(13A))
    11. Allowances to MPs/MLAs
    12. Profession tax deduction for salary
    13. Family pension deduction u/s 57
    14. Depreciation u/s 32. 

Illustration:- Individual earning income upto Rs.20,00,000/- ( Salary), 80C deduction assuming eligible for Rs. 1,50,000, 80G deduction- 1,00,000 , PT:-2,500, Standard deduction for salary:- Rs.50,000.

Particulars

New  Regime

Old Regime

Salary

20,00,000

20,00,000

Less:- Standard Deduction

(50,000)

Less:- Professional Tax u/s 16

(2,500)

Net salary/ GTI

20,00,000

19,47,500

Deductions under Chp VI-A
80C

(1,50,000)

80G and other sections

(1,00,000)

Total income

20,00,000

16,97,500

Basic Tax

3,37,500

3,21,750

 

This is very basic example still, tax under new regime is higher. Hence, every person will have to calculate this every year. May be more than once depending on the availability of surplus for investment purpose and any life events. Hence, a person may end up doing such calculations at least two to three times in a year. 

However, a person who is not an expert in taxation will find it difficult to go through each section and decide each year. 

An ideal situation would have been to remove exemptions and deductions and have same simplified system for everyone. 

Author Nikhil Vadia is a Mumbai-based Chartered Accountant. Views personal.

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