October 31, 2020

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New Income Tax Regime – Structural Shift in Taxation under Income Tax Act as per the Budget 2020, Structural Shift in Taxation under Income Tax Act as per the Budget 2020 Where you Opt in Old or New?

Honourable Finance Minister (FM) Nirmala Sitaraman in her budget has introduced a new
taxation regime under personal taxation. Instead of giving relief to all the
Individual & HUF by increasing the tax slabs directly, Budget 2020 have
proposed to introduce new section 115BAC in the Income Tax Act 1961 in which
Individuals or HUF have been given an option to give up various exemptions and
get the advantage of lower tax rates. Following is the comparison of the existing
tax rates and the new tax slabs.
INCOMES(In Rs)                OLD RATE (IN %)                   NEW RATES
(IN%)
Upto Rs 2,50,000                                NIL
                                        NIL
RS 2,50,001 to Rs 5,00,000               
5                                             5                     
Rs 5,00,001 to Rs 7,50,000                20                                           10
Rs 7,50,001 to Rs 10,00,000              20
                                           15
Rs 10,00,001 to Rs 12,50,000            30                                            20
Rs 12,50,001 to Rs 15,00,000            30                                            25
Above Rs 15,00,000                           30
                                           30


Under the new
taxation regime, Assessee shall have to decide every year whether to continue
with the old tax system or choose the newer tax system. He shall have to
calculate how much benefit he will get under the existing tax system with all
deductions & exemptions against the reduction in tax liability under the
new tax system by forgoing various deductions & exemptions. It’s too much
to expect from a normal assessee to make such complex calculations himself and
make a decision. New tax regime has increased the complexity instead of
simplifying it. The example is given by the honourable FM of a person earning Rs
15 lakhs per annum and highlighting a major tax saving of Rs 78,000 by
comparing the tax liability under both the existing tax system and newer tax regime
with the assumption that the assessee does not avail any deductions and exemption.
However, the assumption has itself a big flaw. Out of all the 4.86 crore
returns filed by the Individuals &Huf for the FY 19-20 till January 2020,
there will be an extremely minuscule number of Assessees who might not have
claimed any deduction or exemptions in any form in their income tax returns.
Many deductions are mandated by the statute e.g Contribution to Provident Funds
by the employee. Many of the deductions/exemptions are claimed by the assessee
for the expenses, they will have to incur for their livelihood eg. paying rent
and claiming HRA (in case of salary) or claiming deduction u/s section 80GGA in
case of another assessee. Almost all the assessee shall have at least one account
in Saving Bank in which assessee will earn an interest and claim deduction u/s
80TTA. Hence some of the deductions /exemptions claimed by the assessee are
actually for the expenses which are either mandated by some other statute or
they have to be incurred for the livelihood. We can say that some
deductions/exemptions are not optional but necessary. Let us understand the new
tax regime with an illustration and also compare it with the existing tax
system. Mr X is employed by ABC Limited. The salary structure for the FY
2020-21 is as under: Particulars Amount(Rs) Basic 6,21,000 HRA 3,10,500 Special
Allowance 2,58,000 Total Salary 11,89,500 Professional Tax 2,400 Employees
Contribution to Provident Fund 74,520 Mr X also invested Rs 60,000 in Tax Saving
Mutual Funds and pay insurance premium of Rs 14,000, medical insurance premium
of Rs 19,000. He pays rent of Rs 25,000 pm He also earns interest of Rs 5,500
on balance in saving bank account. Mr X has also availed Housing Loan of Rs
50,00,000 on which he paid Rs 1,25,000 as interest and Rs 65,500 as principal
amount. Calculation of Tax under both Tax Regimes: Particulars As per Existing
Tax Regime As per New Tax Regime Salary Total Salary 11,89,500 11,89,500 Less :
HRA (2,37,900) Not Allowed Professional Tax (2,400) Not Allowed Standard
Deduction (50,000) Not Allowed Net Taxable Salary(A) 8,92,200 11,89,500 House
Property Rent income 0 0 Less: Interest on Loan 1,25,000 Not Allowed Net
Income (1,25,000) 0 Income from Other Sources Interest on saving bank account
5,500 5,500 Total IFOS Income (C) 5,500 5,500 Gross Total Income(A+B+C)
7,79,700 11,95,000 Less: Deductions 80C: Contribution to Provident Fund 74,250
Not available Investment in Tax Saving Mutual Funds 60,000 Not available
Principal Portion of Housing loan instalment 65,500 Not available Total
deduction u/s 80C(Restricted) (A) 1,50,000 Not available 80D Medical Insurance
Premium (B) 19,000 Not Available 80TTA: Interest on Saving Bank Interest(C)
5,500 Not Available Total Deductions (A+B+C) (174500) 0 Net Taxable Income
6,05,200 11,95,000 Tax Amount 33,540 1,14,000 Less : Rebate u/s 87A 0 0 Add
Health & Education [email protected]% 1,342 4,560 Total Tax liability 34,882 1,18,560
Based on the above example, we can clearly see that the new tax regime is not
beneficial to the assessee as he has to pay Rs 1,18,560 as tax while if he
decides to remain under the existing tax regime, he would not have only Rs
34,882. Thus, there will be an extra tax payout of Rs 83,678. Pros of New Income
Tax Regime:
1) There are chances that people will stop buying insurance
policies at the end of the financial year just for the purpose of saving tax.
2) Millennial’s will be the most beneficiary of the new tax regime as they dont
have a tendency to save and invest. With lower tax on their income, they will
have higher disposable income and they will increase the consumption in the
economy. Cons of the New Tax Regime:

1) India is a country where the government
does not sponsor social security to its citizens. There are few schemes by the government
where free healthcare benefits, subsidized housing benefits and pension
benefits are available to the residents of our country but there is a lack of
fully developed social security mechanism in India unlike developed countries
in the world. Hence people have to save and invest on their own for their
retirement. Various deductions under section 80C and section 80D motivates and
incentives people to invest by giving tax benefits. However, under the new tax the regime, with no incentive to save and invest for retirement, there are chances
that people, especially the younger generation, shall not save for retirement
and start spending recklessly and will not be able to build sufficient
retirement corpus and will end up zero savings in future.

2) The Government of
India has a very ambitious dream of Housing for All till 2022 under PradhanMantri Awas Yojana. To accomplish this dream, the government is giving subsidy
to first-time home-buyers. However, the government has taken a contrarian stand
under new tax regime by not allowing deduction of Interest on Housing Loan u/s
24(b) and principal portion of housing loan under section 80C, or stamp duty
payment under section 80C. Such provisions will be a roadblock for the
government’s ambitious dream.

3) In order to incentivise the purchase of the
electric vehicle by an individual, the government in its Budget 2019,
introduced section 80EEB in which individuals can claim a deduction of Interest
Payment up to Rs 1,50,000 on loan taken for buying electric vehicles. But in the
new tax regime, the assessee will not be able to claim this deduction. This will be
a roadblock for the government’s efforts to push clean energy and incentivise
electric vehicles.

4) Government has also disincentivized the manufacturing
activities undertaken by the individuals /Huf especially MSME units by not
allowing additional depreciation under section 32(1)(iia) & deductions
under section 35AD under the new tax regime. This will dis-incentivize new
investments and expansions plans of the MSME sectors and indirectly affect job
creation. We all know that msme is the key job creator in our country.

5) The new tax regime will be a big headache for the employers as their employees will
have the option to choose one of the tax systems. The calculation of TDS will
be more tedious as there is no clarity from the government regarding how and
when the declaration shall be taken from employees who want to opt for a new
tax regime.

6) Individual and HUF with business and/or profession income have
not been given the option to choose the new tax regime for every previous year, unlike another assessee. There was no such need to differentiate between assessee
for the new tax regime. Who will opt for New Tax Regime:

1) Millennials who
generally don’t save and invest will be the biggest beneficiary of the new tax
regime.

2) Young Assessee who have started earning recently and whose insurance
policies and other tax-saving investments are taken care of by their parents.

3)
Assessee whose are in high tax bracket but do not have investments options and
other tax-saving liabilities e.g. existing Home Loans, HRA etc

4) Employees who
are earning higher salaries and their employers are not liable for registration
under the EPF Act.

5) The assessee who is not into manufacturing business where he does
not have an option to claim additional depreciation u/s 32(iia). Suggestion to
the government for making changes in the new tax regime to make it more
practical and attractive. 

1) The Government has tried to implement the tax
regime as suggested in the DTC code report submitted to the government in
August 2019 which suggested substantial changes in tax slabs and lower tax
rates and New Tax slabs suggested as under :

PARTICULARS                                           
                              AMOUNT (Rs)

Basic                                                                                                   6,21,000
HRA                                                                                                   3,10,500
Special Allowance                                                                              2,58,000
Total Salary                                                                                         11,89,500
Professional Tax                                                                                  2,400
Employees Contribution to Provident Fund                                       74,520
Mr X also
invested Rs 60,000 in Tax Saving Mutual Funds and pay an insurance premium of Rs
14,000, medical insurance premium of Rs 19,000. He pays rent of Rs 25,000 pm He
also earns interest of Rs 5,500 on balance in saving bank account. Mr X has also
availed Housing Loan of Rs 50,00,000 on which he paid Rs 1,25,000 as interest
and Rs 65,500 as the principal amount. Calculation of Tax under both Tax Regimes:
Particulars
                As per Existing Tax Regime               As
per New Tax Regime
Salary
Total Salary                                         11,89,500
                               11,89,500
Less :
HRA                                                   (2,37,900)
                               Not Allowed
Professional Tax                                  (2,400)
                                    Not
Allowed
Standard Deduction                           (50,000)
                                  Not
Allowed
Net Taxable Salary(A)                       
8,92,200                                 11,89,500
House Property
Rent income                                                    0
                                    0
Less :
Interest on Loan                                  1,25,000
                                 Not
Allowed
Net Income                                         (1,25,000)
                                  0
Income from Other Sources
Interest on saving bank account         5,500                                       5,500
Total IFOS Income (C)                       5,500
                                      5,500
Gross Total Income(A+B+C)             7,79,700
                                 11,95,000
Less: Deductions 80C:
Contribution to Provident Fund         74,250                                     Not
available
Investment in Tax Saving Mutual Funds 60,000                                Not available
Principal Portion of Housing loan instalment 65,500                        Not available
Total deduction u/s 80C(Restricted) (A) 1,50,000                             Not available
80D Medical Insurance Premium (B) 19,000                                     Not
Available
80TTA: Interest on Saving Bank Interest(C) 5,500                           Not Available
Total Deductions (A+B+C)                            (174500)
                                 0
Net Taxable Income                            6,05,200
                                 11,95,000
Tax Amount                                        33,540
                                    1,14,000
Less :

Applicable if the Net Taxable Income is less than Rs. 5,00,000/-


 

Rebate u/s 87A                                               0
                                         0 (Not Applicable)

      (Applicable if the Net Taxable Income
less than Rs. 5,00,000/-
)
Add Health & Education [email protected]% 1,342                                        4,560
Total Tax liability                                34,882
                                    1,18,560

Based on the above example, we can clearly see that
the new tax regime is not beneficial to the assessee as he has to pay Rs
1,18,560 as tax while if he decides to remain under the existing tax regime, he
would not have only Rs 34,882. Thus, there will be extra tax payout of Rs
83,678.

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