From lower tax rates to reforms in tax assessment, the Union Budget 2020 has proposals that could offer relief to individual taxpayers. However there are conditions that you need to be aware of. Read on to know the details and how the Budget could impact you.
Lower tax rates
The Budget has proposed a New Tax Regime in addition to the existing, i.e. Old Tax Regime. However the New Tax Regime is optional. To put it simply, the assessee can choose between the New Tax Regime and the Old Tax Regime depending on what is best suitable from a tax planning point of view.
New vs. Old – Which is better?
The New Tax Regime has proposed lower income-tax rates, for income segments up to Rs 15 lakh. But you need to remember that the proposed lower tax rates will be applicable only if you are willing to give up exemptions and deductions available under various provisions of the Income-tax Act, 1961.
This means that when you choose the New Tax Regime, you will have to forgo some exemptions [such as Leave Travel Allowance (LTA), House Rent Allowance (HRA), etc] and deductions available under chapter VI A of the Act that grant deductions under Section 80 [such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G, 80GG, 80GGA, 80GGC, etc].
Only the deduction under Section 80CCD(2) [i.e., employer’s contribution on account of an employee in a notified pension scheme] and Section 80JJAA [i.e. for new employment] can be claimed.
Even the Standard Deduction under Section 16 [which is currently Rs 50,000] available to salaried individuals and the deduction on home loan interest, under Section 24(b) will be disallowed. Around 70 exemptions and deductions have been removed in the New Tax Regime.
Old regime better option for high-income earners
| Particulars | Old Tax Regime (Rs) | New Tax Regime (Rs) |
|---|---|---|
| Gross Income | 1,000,000 | 1,000,000 |
| Deductions: | ||
| U/Sec: 80C | 150,000 | – |
| U/Sec: 80D | 25,000 | – |
| U/Sec: 24(b) | 75,000 | – |
| Taxable Income | 750,000 | 1,000,000 |
| Tax Slab (OLD) | ||
| 0 to 2.5 Lakh | – | – |
| 2.5 to 5 Lakh @ 5% | 12,500 | – |
| 5 Lakh to 10 Lakh @ 20% | 50,000 | – |
| > 10 Lakh @ 30% | – | – |
| Tax Slab (NEW) | ||
| 0 to 5 Lakh | – | – |
| 2.5 to 5 Lakh @ 5% | – | 12,500 |
| 5 to 7.5 Lakh @ 10% | – | 25,000 |
| 7.5 Lakh to 10 Lakh @ 15% | – | 37,500 |
| 10 Lakh to 12.5 Lakh @ 20% | – | – |
| 12.5 Lakh to 15 Lakh @ 25% | – | – |
| > 15 Lakh @ 30% | – | – |
| Income Tax | 62,500 | 75,000 |
| Cess @ 4% | 2,500 | 3,000 |
| Total Tax Outgo | 65,000 | 78,000 |
Going by the illustration above, if the gross income is Rs 10 lakh or above and you are utilising deductions under Section 80C, 80D, and 24(b) of the Income Tax Act, 1961, then you are better off under the older regime; it works in your favour from a tax planning standpoint. While for individuals in the middle-income group, earning a gross income of say Rs 5 lakh; the new regime may prove advantageous.
That being said, if you are looking to fulfil your financial obligations, namely – wealth creation through investments in tax-saving instruments; paying premiums to address insurance needs (life and health); paying children’s tuition fees; paying Equated Monthly Instalments (EMIs) of an education loan; buying a house with a home loan; and so on, the older regime still works in the interest of your financial wellbeing.
Apart from changes in personal tax, the Budget also proposed some other changes that could impact you as an investor. Let us see what these are:
• Currently, companies have to pay Dividend Distribution Tax (DDT) of 15% plus surcharge and cess on dividend paid to investors. This means the dividend received by investors is after the deduction of taxes. In addition to this, if dividend income exceeds Rs 10 lakh in a year, investors have to pay an additional 10% tax. This leads to double taxation for investors. The Budget has proposed the abolishing of DDT and taxing the dividend payable to investors as per their applicable income-tax slab rates. This would benefit individual taxpayers, particularly those in the lower tax slabs.
• The deduction of up to Rs 1.50 lakh on interest paid on ‘affordable housing’ loan — which was allowed for housing loans sanctioned on or before March 31, 2020 — is proposed to be extended for one more year, i.e. till March 31, 2021, for ‘first time home buyers’. This is a welcome step for new home buyers.
• As part of tax reforms, it is proposed to further ease the process of allotment of PAN (Permanent Account Number), by soon launching a system under which PAN shall be instantly allotted online based on Aadhaar without filling up a detailed application form.
• Also, as a part of tax reforms, it is proposed to amend the Income Tax Act to enable ‘faceless Appeal’ on the lines of ‘Faceless Assessment’.
• A ‘Vivad se Vishwas’ Scheme has been introduced to reduce the litigations in direct taxes. If your tax amount is disputed, you would be required to pay only the amount of the disputed taxes and will get a complete waiver of interest and penalty provided you pay by March 31, 2020. If paid under this Scheme after March 31, 2020, some additional amount will have to be paid. Vivad se Vishwas’ Scheme will remain open till June 30, 2020.
