The highlight of Budget 2020 speech was “new, simple and reduced income tax slabs”. It was very well received by the audience and people were exited that they would save a lot of money!
But as usual the devil lies in the details. We went through the finance bill and as we read through it seemed like the new tax slab structure would be beneficial for only very special cases and that too marginally.
If you would have heard Finance Minister speech, she talked about forgoing some deductions if you want to avail new tax slab.
I have highlighted the common tax exemptions for most salaried.
Below is an estimate of tax exemptions you might have to forgo for new tax regime.
You need to forgo Rs 5 lakh tax deduction to shift to new tax regime. I do not see how it would make any sense. The new regime is only beneficial to people who had very tax inefficient salary or did not avail on any deductions in the past (like senior citizens on interest & pension income). We show this by some examples:
Also Read: 25 Tax Free Incomes & Investments in India
Assuming a salaried person has total income of Rs 15 Lakhs and claim tax exemption of Rs 3 lakhs as follows:
What would be beneficial for him? Below is the comparison:
Headers | Old Tax Slab | New Tax Slab |
Total Income | 1,500,000 | 1,500,000 |
Total Exemption | 300,000 | 0 |
Net Taxable Income | 1,200,000 | 1,500,000 |
Income Tax | 172,500 | 187,500 |
Cess @ 4% | 6,900 | 7,500 |
Total Tax with Cess | 179,400 | 195,000 |
As you can see he is good with the older tax regime.
Assuming a salaried person has total income of Rs 10 Lakhs and claim tax exemption of Rs 2 lakhs as follows:
What would be beneficial for him? Below is the comparison:
Headers | Old Tax Slab | New Tax Slab |
Total Income | 1,000,000 | 1,000,000 |
Total Exemption | 200,000 | 0 |
Net Taxable Income | 800,000 | 1,000,000 |
Income Tax | 52,500 | 75,000 |
Cess @ 4% | 2,100 | 3,000 |
Total Tax with Cess | 54,00 | 78,000 |
As you can see he is good with the older tax regime.
I think the option of new tax slabs just complicates taxation and now you must do additional calculations – one with tax deductions and other without it. In most cases you would be better off with the existing tax slabs. All in all the new tax slab is just a jumla without any substance in it.
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Such a let down, this government is all about blowing trumpet but fail to deliver any credible outcome. Really disappointed ☹️.
Thank you for making the income tax new regime so comprehensive.
If the FM thinks everybody will be very exited with the intentionally created confusion and jump into the new tax slab to do more expenditure and less savings it's a foolish idea.
For very few new generation people who are paying EMIs for Car/Luxury etc etc may fall in the trap not the mass in a gloomy future.
I studied carefully. Thank you for the detailed information.
I am a senior citizen aged 70. I want to know whether exemption of Rs. 50000/- from Interest on Deposit is allowed under
under new tax scheme.
Thank you sir.