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Sunday 5 April 2020

New Income Tax Regime Good For Real Middle Class

Announcing the new tax slabs, Finance Minister Nirmala Sitharaman said that this arrangement would be optional. That is, if a person wants to pay tax according to the old tax slab, he can continue to do so! So, what’s the brouhaha all about? Until you know how to handle the new slabs, continue filing your returns the old way.

In the old system, taxpayers got many discounts and concessions while paying taxes. Sitharaman said if a taxpayer wanted to take advantage of this system, he will have to waive around 70 concessions and exemptions out of 100. This may look like a meaningless exercise, but the finance minister claimed that the new slabs were meant to make the tax system “simple” and “easy”.

A person will have to take help of a tax expert to understand the gain or loss arising out of leaving deductions and exemptions in the new system. No person would want to give up the benefit of the exemption available in the old system.

Who does not take advantage of the exemption available under 80C? The old system had a standard deduction of up to Rs 50,000, LTA, interest on a home loan and a rebate of up to Rs 50,000 on interest income to senior citizens. One will have to forgo these concessions to take advantage of the new tax regime.

At the time of tax filing, the rebate of up to Rs 2 lakh on the interest paid on home loans with LTA, HRA is a huge amount, which is not included in the new arrangement with other exemptions and deductions.

Whether the new I-T system is of any use to you depends on your income and your investment and you cannot calculate it yourself without the help of a tax expert. To avail of the new tax regime, taxpayers will have to waive these exemptions. These are the exemptions that almost every salaried employee uses at the time of filing taxes.

  1. Leave Travel Allowance (LTA)
  2. House Rent Allowance ie HRA
  3. Standard deduction up to Rs 50,000
  4. Exemption of Rs. 15,000 in respect of family pension and
  5. 80C, which includes PF contribution, LIC premium, school tuition fees, ELSS, NPS and PPF investment

Many other exemptions will have to be waived while paying taxes under the new tax regime.

After the corporate tax was reduced to 22%, people asked whether the corporate sector would now pay less tax than the normal taxpayer. The government has made such an arrangement to avoid this criticism. But bureaucrats have to understand that there is a big difference in the tax composition of common taxpayers and corporate taxpayers.

Under the old system, no tax had to be paid on annual income up to Rs 2.5 lakh while there was a 5% tax on an annual income of Rs 2.5-5 lakh. The rate was 20% on Rs 10-20 lakh while those earning Rs 20 lakh to Rs 2 crore annually had to pay a 30% tax. A person earning more than Rs 2 crore had to pay 35% tax.

How to save under new tax regime

You may not invest in PPF, LIC, insurance, tax-saving ELSS mutual funds, etc and yet save taxes. Let’s first check what all concessions you need to forgo to make a switch (you don’t have to switch, I repeat).

So far, deductions were available under Section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc. If you wish to switch to the new slabs, don’t claim tax relief for investments under PPF, LIC, insurance, tax-saving ELSS mutual funds, etc.

So far, there used to be a standard deduction, deduction for entertainment allowance and employment, professional tax. There was a house rent allowance. In other words, you could show a certain amount of your income as your expenditure on house rent and thus be spared paying tax on that amount. You got a leave travel concession or leave travel allowance (LTA). You got some allowances according to Clause 14 of Section 10.

MPs and MLAs got allowances as per Clause 17 of Section 10. There was an allowance for the income of a minor according to Clause 32 of Section 10. There was an exemption for an SEZ unit in Section 10AA. Interest under Section 24 in respect of self-occupied or vacant property referred to in Sub-Section (2) of Section 23.

One could claim an additional deprecation under Clause iia of Sub-Section 1 of Section 32. There were deductions under Section 32AD, 33AB and 33ABA. There were deductions for donation for or expenditure on scientific research contained in Sub-Clause ii or Sub-Clause iii of Sub-Section 1 or Sub-Section 2AA of Section 35. Then there was a deduction under Section 35AD or Section 35CCC. Finally, you could avail of the deduction from family pension under Clause iia of Section 57.

Now, for years, economists have opined, and rightly so, this made India’s income tax system one of the most complex and complicated in the world, no matter how much you enjoyed it when your CA taught you tricks to escape high taxation.

Calculate how much you save since you are paying your income tax at a much lower rate. Under the new system, taxpayers with income up to Rs 5 lakh will no longer have to pay any tax. A 10% tax on an annual income of Rs 5 to 7.5 lakh, 15% on the income of Rs 7.5 lakh to Rs 10 lakh, 20% on the annual income of Rs 10 lakh to Rs 12.5 lakh, 25% on an annual income of Rs 12.5 to 15 lakh and 30% tax if you earn more than Rs 15 lakh.

A person with an annual income of Rs 15 lakh had to pay Rs 2,73,000 of I-T earlier. Now he pays a much lower Rs 1,95,000. That’s a saving of Rs 78,000.

However, those with incomes higher than Rs 20 lakh will find the old system with exemptions a better option.

Remember, the NPS under Section 80CCD(2) continues even if you switch. Your employer must offer the option.

If you are an employer yourself, your contribution of up to 10% of the employee’s salary (basic + DA) is still eligible for tax relief under Section 80CCD(2).

The new regime is good for those who have just started their careers and are not likely to have taken loans already. This budget is meant to be good for the middle class, not the rich who are fancifully called the “upper middle class”. Look at it in the light of the big saving for people earning up to Rs 15 lakh a year.

If your investments are subjected to Section 80C alone, you end up saving Rs 14,820 if you earn up to Rs 15 lakh a year.

Sandeep Sharma
Sandeep Sharma
Chartered accountant

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