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Personal Finance

Budget 2020: Lower Tax Slabs – Just An Eye Wash, But Check For Yourself

Tax-Changes.jpg

Budget 2020 is here and the much-awaited new tax slabs are out. They are “optional” – you can choose to take them, or remain with the old system.

The complication never ends. The Finance minister wanted to simplify the direct taxation system by removing exemptions, but introduced three more slabs and made things complicated instead. The interesting part is, All this is optional. You can opt for the old taxation system with three slabs and claim deductions or can move to new taxation system with six slabs and have no deductions.

What Is The New Tax Slab?

The alternate tax system has six different slabs starting from 2.5 lakh to 15 lakh. In alternate tax if your income is upto 5 lakhs then your income is exempt from any kind of tax, if your income exceeds Rs 5 lakhs then you will have 2.5 lakh tax slab coming to play.

The alternate taxation slab and existing slabs are as below.

Tax Slabs Budget 2020

The new rule allows you to choose between the existing taxation system and the new (alternate) taxation system, whichever works for you. If you are opting for alternate taxation then you will not be able to claim any deductions (We will discuss what exemption have been kept in alternate taxation in below section) However if you choose the new taxation slabs, then you cannot come back to the existing taxation system (if you have business income). 

If you don’t have business income, you can switch back and forth between the two systems. (This part has been changed from the original post)

What Exemptions Form Part of Alternate Taxation System?

All the deductions under Chapter VI A of income tax are not allowed in alternate taxation system barring some.

The exclusions include

  • ELSS investments,
  • PPF LIC (under 80 C),
  • Medical Insurance (80 D),
  • Interest paid on Housing Loan, Education Loan  and Electric Vehicle Loan (80 E),
  • Donations to Charitable Institution and Political Parties (80 G) etc.

Budget 2020: Lower Tax Slabs - Just An Eye Wash, But Check For Yourself

More importantly House Rent Allowance and Standard Deductions also form the part of the exclusions.

Basically, you can’t claim any of these exemptions if you want the “lower” slab rates.

To add more the Sodexo coupons (which were earlier tax free) will now form part of taxable income in the alternate taxation system

Now it gets important to know what is included. The only part included in this one is if your employer is contributing to National Pension Scheme, you can ask the employer to pay on your behalf a maximum of Rs. 750,000 per year which will not be taxed. The limit of contribution by employer was not taxed earlier, and only from last year the extra amount was taxed (beyond 10%) for NPS alone (There were no limits for other superannuation schemes). Now they have all been brought down to 750K max per year

Do I Save Tax If I Move to The New Slabs?

The short answer, for the most part is: No.

Only a person, living in an owned house, with no housing loan, no kids, no employee PF or mandatory NPS, will see a reduction in taxes.

The taxation might vary according to individual tax payers contribution under various headers. If a tax payer just claims HRA and utilises is 80 C deductions, then he will be saving lot more in the existing taxation system then migrating to alternate tax regime.

In the below table we have tried to illustrate how existing tax slabs fares with the alternate tax mechanism.

Alternate tax Working Budget 2020

At a basic level, we believe a taxpayer will have investments under 80C and will claim HRA or will have deductions under housing loan principal and interest, education loan interest etc.

On top of that standard deduction of Rs 50,000 is common across all tax slabs and no need of showing any proof for the same. It’s worth claiming. In above table the existing tax system has beaten the proposed alternate tax system by miles. Even with only three basic deductions, you are saving a substantial amount in existing taxation then the current offered alternate taxation. Now if you have other deductions like medical insurance, home loan repayment (interest + principal) and interest paid for educational loan, for senior citizens interest earned on FDs (upto Rs 50,000) etc, then the numbers would be much better in existing tax system.

Calculate for yourself!

To calculate for yourself, what the old and new regimes mean: Click this link 

Enter the data that applies to you and you’ll see if you should shift or not. You may not have HRA for instance (staying in own house) or a housing loan interest (paid off the loan) or you may have a lower 80C limit.

Even in 80C there’s no need to run to save taxes, if you are only saving to avoid tax. Sometimes the new regime is actually better – and you don’t need to do the tax-saving ELSS or insurance!

(Try with inputs of Zero HRA and Zero Housing Loan Interest – with an income of Rs. 20 lakh, for example)

For such a person, don’t bother with any 80C investments like insurance policies or ELSS funds. You’ll have more cash in hand by shifting to the new regime.

The Verdict

For most people, this new regime of multiple slabs is not useful and you should just stay with the old one. It however does benefit a few people, who otherwise were forcibly investing in insurance or ELSS funds.

But remember that this applies only from April 2020, so you should continue what you currently are doing till then.

Overall, this is not simplification. It’s super-complicated, even to figure out what tax regime to take!


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