NEW DELHI: While economists may rate Budget 2020 on a complex set of parameters, for middle-class taxpayers it boils down to a single parameter: relief in taxation, implying what part of their hard-earned money will be at their disposal in terms of tax reliefs. To begin with, Finance Minister Nirmala Sitharaman has slashed income tax rates substantially, but with caveats.
As per the new regime (also optional), the tax rate on income in the range of Rs 5-7.5 lakh will be halved to 10 per cent, income ranging from Rs 7.5-10 lakh will attract a 15 per cent tax in the new regime, down from the prevailing 20 per cent.
However, if you are opting to pay tax under the new lower personal income tax regime, you have to give up completely on the myriad tax exemptions available earlier. About 70 exemptions that will not be available under the new regime include: Section 80C (Investments in PF, NPS, Life insurance premium), Section 80D (medical insurance premium), tax breaks on HRA and on interest paid on housing loan. Tax breaks for the disabled and for charitable donations go too.
The question that arises now is: if it’s reasonable to forego exemptions and opt for the new regime or stick to the old regime (with reductions) to save more? Sitharaman’s calculation shows a person earning Rs 15 lakh per annum and not availing any deductions will now pay Rs 1.95 lakh in tax in place of Rs 2.73 lakh, a savings of Rs 78,000 under the new tax regime.
But, tax experts say, whether the old or new regime is beneficial will vary on a case-to-case basis, but typically, higher the exemptions an individual was claiming, the less likely he is to benefit under the new personal tax regime.
"The new regime is regressive for individuals, who attempted to maximise their tax benefits. While it may be less paperwork for many, they would benefit from the old regime that comes with the exemption,' said Archit Gupta, founder and CEO of ClearTax.
For instance, a person who has bought a long-term life insurance policy may have to continue paying the premium and claiming the tax benefit on it. Taxpayers who have home loans and have been enjoying other exemptions might as well stick to the old regime, while those who don’t enjoy lower exemptions might consider the new regime.
Experts say individuals can also choose to not block their money in tax-saving instruments such as Public Provident Fund or Employees’ Provident Fund Organisation anymore. "It is a clear indication that the government can no longer afford to pay tax-free interest rates on PPF as it wants to nudge all taxpayers towards National Pension Scheme," Gupta pointed out.
While the idea of the new regime is to "simplify" the tax procedure, experts see the dual tax regime only making it more complicated with each individual having to do his/her own calculations or seeking professional’s help to figure out which regime is more beneficial.
Tax savings
FM says that a person earning Rs 15 lakh/annum and not availing any deductions will now pay Rs 1.95 lakh in tax in place of Rs 2.73 lakh, saving Rs 78,000