Budget gives option of lower income tax rates, new tax slabs minus 70 exemptions

• Tax payers have the option to choose between the existing income tax regime and a new regime
• New regime has slashed income tax rates and new income tax slabs but no tax exemptions
• Which tax regime would be beneficial, i.e., result in lower tax payable for each individual is likely to depend on his/her income composition and investments done

Union Budget 2020 has proposed a new tax structure by slashing income tax rates and rejigging the income tax slabs to reduce total tax liability by individuals. As proposed in the new tax regime, 70 tax exemptions will be removed but the income between Rs 5 lakh and Rs 7.5 lakh will be taxed at 10% down from current 20%, income between Rs 7.5 lakh and Rs 10 lakh will be taxed at 15% down from current 20%, and income between Rs 10 lakh and Rs 12.5 lakh will be taxed at 20% down from current 30%. Income between Rs 12.5 lakh and Rs 15 lakh will be taxed at 25% down from current 30%. Incomes above Rs 15 lakh in a financial year will continue to be taxed at 30%.

The budget 2020 has given taxpayers the option to choose between the existing income tax regime (which allows availing existing income tax exemptions and deductions) and a new tax regime with slashed income tax rates and new income tax slabs but no tax exemptions and deductions. The new tax regime offers lower tax rates and new tax slabs and simultaneously removes tax exemptions/deductions and will result in lower tax outgo for taxpayers, according to the finance minister.

Which tax regime -old or new-would be beneficial and result in lower tax payable for each individual is likely to depend on his/her income composition and the investments done. Each individual will have to do his/her own income calculations to figure out which tax regime suits more. For example, a person who has bought a long term life insurance policy may have to continue paying the premium.

Further as proposed in the Budget, as dividend income becomes taxable in your hands, your taxable income will increase. This will add to the uncertainty about how much tax relief an individual will get from all the budget proposals together.

Once these proposals are passed by the Parliament, these changes will become effective from the financial year 2020-21.

Parizad Sirwalla, Global Mobility Services-Tax, KPMG India says, “The existing tax slabs have been rejigged to make way for a new personal tax regime for individuals opting to forego prescribed tax deductions and exemptions such HRA, tax saving investments under section 80C, standard deduction for salaried taxpayers, etc. Additional home loan interest deduction of Rs 1.5 lakhs has been extended by one year for first time home buyers.”

Tax slabs under new, optional regime

Cess and surcharge on income tax payable in the new proposed personal tax regime remain the same as in the existing tax regime.

The effective tax rate for individuals with taxable income up to Rs 5 lakh would be nil under both the new and the existing tax regime as these individuals would be able to avail the tax-benefit of rebate up to Rs 12,500 under Section 87A under both regimes.

Currently, income up to Rs 2.5 lakh for resident individuals (age below 60 years) is exempt from tax. Similarly, for senior citizens aged 60 years and above but below 80 years, income up to Rs 3 lakh is exempt from tax. Income up to Rs 5 lakh is exempt from tax for super senior citizens (age 80 years and above).

It must be noted that the then finance minister, Piyush Goyal, during the interim Budget in February 2019, announced a tax rebate of up to Rs 12,500 if net taxable income does not cross Rs 5 lakh. Thereby, making zero tax payable by an individual if his/her taxable income does not exceed Rs 5 lakh.

The noise for a reduction in personal income tax rates/increase in tax exemption limits grew louder after the government slashed corporate tax rates in September 2019. It is expected that this can give a fillip to consumption in the economy.

The new Direct Tax Code report submitted to the Finance Ministry in August last year, too, recommended sweeping reforms for personal taxation. The report is yet to be released to the public for discussion.

Income tax slabs and rates for individuals below 60 years of age

Income tax slabs and rates for senior citizens (Age between 60 years and 80 years)

Income tax slabs and rates for super senior citizens (Age 80 years and above)

Income tax rates for individuals below 60 years are as follows: No tax on income up to Rs 2.5 lakh, 5 per cent tax on income between Rs 250,001 to Rs 5 lakh; 20 per cent tax on income between Rs 500,001 and Rs 10 lakh; and 30 per cent tax on income above Rs 10 lakh.

For senior citizens (aged 60 years or above but less than 80 years), income up to Rs 3 lakh is exempt from tax. Income from Rs 300,001 to Rs 5 lakh is taxed at 5 percent, from Rs 500,001 to Rs 10 lakh at 20 percent and above Rs 10 lakh at 30 per cent.

For super senior citizens, aged 80 years and above, income up to Rs 5 lakh is exempt from tax. Income from Rs 500,001 to Rs 10 lakh is taxed at 20 per cent and above Rs 10 lakh is taxed at 30 percent.

However, if an individual’s net taxable income does not exceed Rs 5 lakh (i.e., income after claiming deductions and tax exemptions), then the net tax liability will be zero. This is because an individual can avail tax rebate of up to Rs 12,500 under section 87A.

Health and education cess at the rate of 4 percent is levied on the income tax plus surcharge wherever applicable. Surcharge on income tax will also be added as per the income slab applicable to the individual.

Surcharge will be added to the total income tax payable by the individual as follows: 10% for income between Rs 50 lakh and Rs 1 crore, 15% for income between Rs 1 crore and Rs 2 crore, 25% for income between Rs 2 crore and Rs 5 crore and 37% for income exceeding Rs 5 crore.

However, on short-term capital gains as per section 111A and long-term capital gains as per section 112A, a surcharge of 15% will be applicable instead of 25% or 37% as mentioned above.

1. What are income tax slabs and rates proposed in the new tax structure?
   The new income tax slabs and rates proposed are as follows: (a) Up to Rs 2.5 lakh – Nil (b) From 2,50,001 to 5,00,000 – 5% (c) Rs 5,00,001 to 7,50,001- 10% (d) Rs 7,50,0001 to 10,00,000 – 15% (e) Rs 10,00,001 to 12,50,000 – 20% (f) Rs 12, 50,001 to 15,00,000- 25% (g) Above Rs 15,00,000 – 30%
2. Do I have to forgo all the tax exemptions and deductions if I opt for the new tax structure?
   As per the budget proposal, a taxpayer opting for the new tax regime will have to forgo all the commonly available tax-breaks such as those available under sections 80C, 80D etc except for section 80CCD (2), i.e., employer’s contribution to NPS.
3. Can I choose between new and old tax regime every year?
   Yes, you can choose between new and old tax regime in every financial year provided you do not have business income.
4. Is cess and surcharge still payable in the new tax regime?
   Yes, cess at the rate of 4 per cent and surcharge, applicable as per your income level, is still payable in the new tax regime.
5. Can I still claim tax rebate of Rs 12,500 under section 87A in the new tax regime?
   Yes, as per the budget proposals, a taxpayer can still claim tax rebate of Rs 12,500 if his/her net taxable income does not exceed Rs 5 lakh in a financial year.