Overview
The budget of 2020, announced on 1st February 2020, for the first time has given taxpayers an option to choose how much tax they would want to pay. That means, you as a taxpayer can choose to invest and pay tax on reduced income or not invest and pay a lower tax on your actual income. Thus, the onus of choice is on you, the taxpayer. Here are a few pointers that will help you make your one-time choice.
Please note: These changes are applicable for the financial year 2020-2021. Here financial year means, the period between April 1, 2020, to March 31, 2021.
New tax rules
As per the new optional income tax regime, the revised tax rates for the new income slabs are:
| Income slabs | Tax rate |
| Upto Rs. 2,50,000 | Nil |
| Rs. 2,50,000 – Rs. 5,00,000 | 5% |
| Rs. 5,00,000 – Rs. 7.50,000 | 10% |
| Rs. 7,50,000 – Rs. 10,00,000 | 15% |
| Rs. 10,00,000 – Rs. 12,50,000 | 20% |
| Rs. 12,50,000 – Rs. 15,00,000 | 25% |
| Rs. 15,00,000 and above | 30% |
A taxpayer can opt to pay tax at these slashed rates if they are ready to forgo deductions like:
- Leave travel concession
- House rent allowance
- Special allowance u/s 10(14);
- Allowances to MPs/MLAs u/s
- Allowance for the income of minor
- Standard deduction of Rs. 50,000
- Entertainment allowance
- Professional tax
- Loss under the head income from house property for the rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law;
- Deduction from family pension
- Exemption in respect of free food and beverage through vouchers provided to the employee,
- Any deduction under chapter VIA – This includes the deductions for life insurance premium paid, provident fund contributions, investments in tax saving funds, interest on housing and education loan, principal amount paid on housing loan, donations, house rent paid when HRA is not available, medical insurance premium paid and more.
However, deduction under sub-section (2) of section 80CCD (employer contribution on account of the employee in notified pension scheme) and section 80JJAA (for new employment) can still be claimed.
Furthermore, the following allowances are still available under the new tax regime:
- Transport Allowance granted to a divyang (person with a disability) employee to meet the expenditure for the purpose of commuting between place of residence and place of duty
- *Conveyance Allowance granted to meet the expenditure on conveyance in performance of duties of an office;
- Any Allowance granted to meet the cost of travel on tour or on transfer;
- Daily Allowance to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.
However, like in the old tax regime, a taxpayer can claim the rebate u/s 87A (up to Rs. 12,500) if his annual income is within Rs. 5,00,000. That means if you are a taxpayer with income less than or equal to Rs. 5,00,000, it doesn’t matter which tax regime you choose. As per the old and new tax rates, your tax payable will be ‘0’ (See calculations below).
To add, gifts received from the employer up to Rs. 5000 remains exempted under both – new and existing tax regime.
Old tax rules
Keeping human behaviour of resistance for change in mind, the Finance Minister has given an option to every taxpayer to opt for getting taxed at the old tax rates. The tax rates applicable for a taxpayer less than 60 years of age are::
| Income slabs | Tax rate |
| Upto Rs. 2,50,000 | Nil |
| Rs. 2,50,000 – Rs. 5,00,000 | 5% |
| Rs. 5,00,000 – Rs. 10.00,000 | 20% |
| Rs. 10,00,000 and above | 30% |
However, though these optional tax rates are higher than those proposed in Budget 2020, the taxpayer can claim various deductions and get exemptions here. Most common being the HRA, standard deduction, Chapter VI A deductions, tax-free perquisites and more.
So basically, a regular salaried employee not receiving HRA can reduce his total taxable income by Rs.3,11,400 as follows:
| Deduction | The maximum amount available as a deduction |
| Standard deduction | Rs. 50,000 |
| Tax-free perquisite – Food and beverage | Rs. 26,400* |
| Section 80C | Rs. 1,50,000 |
| Section 80D | Rs. 25,000 |
| Section 80GG | Rs. 60,000 |
*Tax-free perquisite – Food and beverage: Assuming a 22 day month, and 2 meals a day.
Comparison between the old and the new tax regime for salaried individuals
Based on the above pointers here are few comparisons to understand the effect of the tax regime better
Profile 1 – You are a salaried individual having no investments and are not claiming HRA or any deductions.
As mentioned earlier, if your income is Rs. 5,00,000 or less, your choice of the tax regime doesn’t matter. However, for any income more than Rs. 5,00,000, the new tax regime is suitable. In spite of the available standard deduction, the reduced tax rates are more beneficial for you. (See calculations here)
Please note: If you opt for the new regime now and your income crosses Rs. 5 lakhs in the future, you will not be able to switch to the old tax regime as of now. In other words, you will lose the advantage of the old regime perpetually.
Profile 2 – You are a salaried individual having no investments but are claiming HRA
Contrary to the above, just by claiming HRA and the standard deduction as per the old regime, the old tax regime helps you save more tax.
*Here HRA is calculated at 40% of the half of basic pay. Basic pay is taken as 50% of the gross salary. (See calculations here)
Profile 3 – You are a salaried individual investing or claiming deductions of a minimum of Rs. 1,50,000 every year. (Here you can assume that you are claiming HRA and investing or just investing)
In this case, the old tax regime is best suitable. However, if you are earning anything more than Rs.15,40,000 deductions of just Rs. 1,50,000 won’t help. That means if your chargeable salary income is more than Rs. 15,40,000, the new tax regime is suitable for you. (See calculations here)
Profile 4 – Minimum investments/deductions needed to save tax. (When we say investments and deductions, this can be divided between, HRA, tax-free perquisites, deductions under chapter VIA – LIC, investments in tax-free avenues, interests and principal of house loan, interest on education loan and more. This is possible only under the old regime.)
| Maximum Gross salary (Based on tax slabs) | *Minimum investment/deduction needed(Standard deduction+PT is separate) |
| Rs. 5,00,000 | <No difference> |
| Rs. 7,50,000 | Rs. 50,000 |
| Rs. 10,00,000 | Rs. 90,000 |
| Rs. 12,50,000 | Rs. 1,15,000 |
| Rs. 15,00,000 | Rs. 1,40,000 |
| Rs. 20,00,000 | Rs. 3,00,000 |
*Please note: These figures are illustrative and not any advice.
Analysis – When to switch to the new tax regime and when not!
The analysis here is simple. Our experts say, if you are a salaried individual and have a minimum of the above-mentioned deductions/investments in your kitty to claim, the old tax regime is a better choice for you. Moreover, you can also discuss with your employer/HR to structure your salary with tax-free perquisites to help you save more on taxes. Usually, at the beginning of the financial year itself, one would know the basic deductions he/she can claim, tax-free perquisites available and then, plan his/her investments wisely. Investing for a secured future has never been a bad idea!
Furthermore, opting in for the new tax regime can be done anytime before filing the income tax return. You need to remember that, once you opt-in for the new tax regime, you cannot switch back to the old regime as of now. So calculate and choose wisely.
Need help to calculate your tax under both regimes? Try the interactive sheet here.
Happy saving and try investing!