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New income tax rules, see what has changed!

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The budget 2020 has offered the option to individual taxpayers to choose between the existing income tax rules and new tax rules with reduced income tax rates and new income tax slabs but no tax deductions and exemptions.

The finance minister has also proposed a standard deduction of ₹40,000 for salaried individuals, ₹30,000 for pensioners, and ₹20,000 for individuals earning between ₹2 lakh and ₹5 lakh per annum in their taxable income.

The deduction would be available only if individuals file their return by July 31 every year as per existing norms or before December 31 of 2020-2021 if they opt for this new scheme.

This article will try to learn about the new income tax, its benefits, and how the tax calculation differs.

New income tax slabs

Total Income New Tax Rate
Up to ₹2.5 lakh Nil
From 2.5 lakh- ₹5 lakh 5%
₹5 lakh-₹7.5 Lakh 10%
₹7.5 Lakh-₹10 lakh 15%
₹10 lakh-₹12.5 lakh 20%
₹12.5 lakh-₹15 lakh 25%
Above ₹15 Lakh 30%

 

New income tax rules benefit.

Under the new income tax rule, the following expenses are generally allowable as deductions:

 

  1. Transport allowances in case of a specially-abled person
  2. Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment
  3. Any compensation received to meet the cost of travel on tour or transfer
  4. Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.
  5. Deduction for employer’s contribution to NPS account (Section 80CCD(2)).
  6. Deduction for additional employee cost (Section 80JJA).

Income Tax calculation

 

With the new income tax rule, the tax calculation gets changed. Compared to the new rule, almost 70 exemptions have been removed in the new income tax rule.

Let’s check out how the tax calculation changes in the rule for various income slabs.

For income of ₹15 lakh

Old Income Tax Rule (Without Deductions) Old Income Tax Rule (With Deductions) New income Tax Rule
Income ₹15 lakh ₹15 lakh ₹15 lakh
Exemptions & Deductions Nil ₹2,00,000 Nil
Taxable Income ₹15,00,000 ₹13,00,000 ₹15,00,000
Tax ₹2,62,500 ₹2,02,500 ₹1,87,500
Cess@4% ₹10,500 ₹8,100 ₹7,500
Total Tax 2,73,000 ₹2,10,600 ₹1,95,000

Tax exemptions assumed: ₹15 lakh under 80C; ₹50,000 standard deduction.

 

 

For Income 30 Lakh

Old Income Tax Rule (Without Deductions) Old Income Tax Rule (With Deductions) New income Tax Rule
Income ₹30 lakh ₹30 lakh ₹30 lakh
Exemptions & Deductions Nil ₹4,25,000 Nil
Taxable Income ₹30,00,000 ₹25, 75, 000 ₹30,00,000
Tax ₹7,12,500 ₹5,85,500 ₹6,37,500
Cess@4% ₹28,500 ₹23,400 ₹25,500
Total Tax 7,41,000 ₹6,08,400 ₹6,63,000

 

Tax exemption can be claimed under section 80C as much as *1.5 lakh for *30 lakhs, *60 lakhs, and ₹1.2 crore.
₹50,000 and Rs 25,000 under section 80D is applicable. *2 lakh for home loans under section 24.

 

 

For Income ₹60 lakh

Old Income Tax Rule (Without Deductions) Old Income Tax Rule (With Deductions) New income Tax Rule
Income ₹60 lakh ₹60 lakh ₹60 lakh
Exemptions & Deductions Nil ₹4,25,000 Nil
Taxable Income ₹60,00,000 ₹55, 75, 000 ₹60,00,000
Surcharge ₹1,61,250 ₹1,48,500 ₹1,53,750
tax ₹17,73,750 ₹16,33,500 ₹16,91,250
Cess@4% ₹70,950 ₹65,340 ₹67,650
Total Tax ₹18,44,700 ₹16, 98,840 ₹17,58,900

Surcharge @10%

For Income of ₹1.2 crore

Old Income Tax Rule (Without Deductions) Old Income Tax Rule (With Deductions) New income Tax Rule
Income ₹1.2 crore ₹1.2 crore ₹1.2 crore
Exemptions & Deductions Nil ₹4,25,000 Nil
Taxable Income ₹1,20,00,000 ₹1,15,75,000 ₹1,20,00,000
Surcharge ₹5,11,875 ₹4,92,750 ₹5,00,625
tax ₹39,24,375 ₹37,77,750 ₹38,38,125
Cess@4% ₹1,56,975 ₹1,51,110 ₹1,53,525
Total Tax ₹40,81,350 ₹39,28,860 ₹39,91,650

Surcharge @15%

From the below tax calculation comparison between the old and new income tax rules, you can see that for income above 15 lakhs. You pay slightly more tax.

Which income tax rule to choose?

The new tax regime is here, and you probably wonder if it’s better than the old one.

The first thing to remember is that your tax bracket will be lower under the new regime, and that’s good news. However, if you’re used to claiming any exemptions or deductions, you might have less money in your hand than before unless you do some calculations.

Here’s what you need to do: calculate all the exemptions you’re currently enjoying and then compare them with what they would become under the new system.

For example, if you live on rent and claim HRA as an exemption, this exemption will no longer be available to you if you shift to the new regime. Other tax-free components include LTA (Leave Travel Allowance), Food Bill, Phone Bills, etc., which will become taxable if you choose to shift to the new tax regime.

Next, look at the deductions you claim as a salaried employee—two deductions automatically come into play here: standard deduction of Rs 50K and EPF contribution towards employee provident fund (EPF).

Under the new regime, you will be unable to claim these deductions, even though you plan to continue contributing to the EPF.
You won’t be able to deduct any of your home loans (if you have any) or insurance policies, which up until now have driven down your taxable income. Combining these exemptions and deductions, subtract them from your salary to determine your taxable income and what it would be if you let go of these deductions. That will help you decide which regime to choose.

If you are someone who invests in stock markets, or real estate, you can opt for capital gains accounts scheme for saving taxes on your extra income.
It is a good way to save your money from extra taxation. Few people know about capital gains accounts scheme in India, and make use of it for tax saving purpose. It is essential that you make use of tax saving instruments to save more.

Final Words.

According to the finance minister, the new tax law offers lower tax slab rates and, at the same time, removes the tax exemption. It will result in a lower tax outgo for the taxpayers.
The finance minister stated that she expects this change to benefit 90% of all taxpayers since their total income from salary or pension is less than ₹5 lakh per annum.
The tax calculation for both the income rules varies, and the choice depends on what kind of saving appetite you have. Apart from other conventional tax saving instruments, capital gains accounts scheme is a good instrument for tax saving.

 

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