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Two Income Tax regimes with and without deductions, which one is better for you? A ready reckoner

The new Income Tax regime will be helpful to those who don’t save or save lesser

Personal taxation is one of the most important things commoners watch out for in any budgets that the central government presents. Mainly because that is what affects them “directly” and either hits their pockets or provides relief. As expected, something similar happened today as well when the Finance Minister Nirmala Sitharaman presented a new Income Tax regime in her second budget in the Parliament.

The Finance Minister announced a new and separate ‘simplified’ tax regime for personal income taxpayers, while retaining the existing tax regime. The new Income Tax system has lower rates, but without any exemptions and deductions, and taxpayers can choose which tax regime to opt while paying their income tax and filing their returns. After the initial announcement, it was time for me to look at the fine print and come up with an explainer for the commoners in a language that they understand and relate to. Here is an attempt at breaking down the complexity for you.

Firstly, the latest “simplified” tax regime is applicable to the following persons:

  1. Individuals and Hindu Undivided Families
  2. Individuals who have no income from “business or profession”, i.e. salaried class with interest income and/or income from house property have an option to choose between old regime or the new regime as per their choice which mainly depends on tax outflow.
  3. Individuals with income from business or professional have to decide this just once and the decision shall be binding on them but an exit from this regime is permitted just once. So, they should be extra careful as to what they wish for.

What is the new scheme of taxation proposed by the Finance Minister

The old regime of slabs and exemptions shall continue, however the taxpayers have been given an option to opt for the new regime with certain conditions which I have tried to explain below. The slabs as per the new tax regime are as follows:

Income From Income Upto Tax Rate
Zero 2,50,000 Zero
2,50,001 5,00,000 5%
5,00,001 7,50,000 10%
7,50,001 10,00,000 15%
10,00,001 12,50,000 20%
12,50,001 15,00,000 25%
Above 15,00,001 30%

 

However, to avail the new scheme the individual will have to forego the following exemptions:

  • Leave Travel Concession (LTC)
  • Housing Rent Allowance (HRA)
  • Allowance for income of minor
  • Standard deduction of Rs. 40,000 from Salary income
  • Entertainment Allowance
  • Professional Tax Paid Deduction – Rs. 2,500
  • Housing Loan Interest Deduction for self-occupied property
  • Additional Depreciation – in cases of business
  • Family Pension Deduction of Rs. 15,000
  • All other deductions under Chapter VI-A which includes widely claimed deductions as – Section 80C – PF, Insurance Premium, Housing Loan Principal Repayment etc.,
  • Section 80D – Medical Insurance Premium for self and family
  • 80E – Education Loan Interest
  • 80G – Donations
  • Business owners will have to forgo carried forward loss or depreciation emanating from aforementioned deductions claimed in earlier years.
  • Loss from house property (Let-out Properties) will not be allowed to be set off against income from any other head of income.

To have a basic understanding, let’s calculate the total tax with ZERO DEDUCTIONS.

Income Income Tax As per Old Regime Income Tax as per New optional regime Tax Savings
₹5 lakh No Amendment No Amendment No Change
₹7.5 lakh ₹65,000 ₹39,000 ₹26,000
₹10 lakh ₹1,17,000 ₹78,000 ₹39,000
₹12.5 lakh ₹1,95,000 ₹1,30,000 ₹65,000
₹15 lakh ₹2,73,000 ₹1,95,000 ₹78,000
Above ₹15 lakh Not Applicable Not Applicable Not Applicable

 

Clearly, if you have no deductions to claim then the new regime is advisable and good for you. This is nothing but basic arithmetic. The rates have gone down hence then the tax outflow obviously will. However, this is not very practical because the taxpayers will definitely have one or the other exemption to avail, like an insurance policy, provident fund contribution or interest on home loan etc.

Read- Budget 2020: Dual tax regime, a complicated tax structure that may require professional help

So as to simplify it further for you, here is a simple table which shall help you to decide which option to choose when you have deductions that can be claimed:

Income Break even deduction to achieve tax parity Decision Making Matrix
₹5 lakh No Change No Change
₹7.5 lakh ₹1,25,000 If your income is up to ₹7.5 lakh and deductions above ₹1.25 lakh then old regime is better for you.
₹10 lakh ₹1,87,000 If your income is up to ₹10 lakh and deductions above ₹1.87 lakh then old regime is better for you.
₹12.5 lakh ₹2,08,500 If your income is up to ₹12.5 lakh and deductions above ₹2.08 lakh then old regime is better for you.
₹15 lakh ₹2,50,000 If your income is up to ₹15 lakh and deductions above ₹2.5 lakh then old regime is better for you.
Above ₹15 lakh ₹2,50,000 If your income is above ₹15 lakh and deductions above ₹2.5 lakh then old regime is better for you.

 

Conclusion:

The new scheme is neither simplified nor very beneficial as analysed by me above. An individual assessee will still have to make two charts and compare instead of one that he was making earlier. The above table only provides a tentative and indicative number and is based on a lot of assumptions but is as close to reality as possible.

The new regime will be helpful to those who don’t save or save lesser than the indicative break-even deduction number I mentioned above. Further our tax exemption system always depends on savings to avail benefits on reduced rates which many critics identify as a hindrance to the consumption economy which is need of the hour.

To sum up, I sincerely feel that the Ministry could have come up with a simpler proposal to increase tax slab limits which would have ensured clarity for the taxpayers.

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Ashutosh Muglikar
Articles on Corporate Laws, Policy, Economics and Politics. Maverick. Lover of Ideas. Slayer of Hoaxes.

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