- Date : 23/03/2020
- Read: 5 mins
The new tax regime has dropped several deductions and exemptions, but there are some incomes that will remain tax-free.
One of the highlights of Union Budget 2020 was the introduction of a new income tax regime. Now deemed optional, this framework features reduced tax rates for various income slabs. It also does away with a lot of tax deductions, including popular sections such as 80C, 80D, and 80TTA.
The new tax regime, however, continues to retain various income components that fall outside the purview of taxability. Let’s take a detailed look at what these are.
1. Interest from post office savings account
The interest earned on post office savings is exempt under section 10(15)(i) of the Income Tax Act. The limit of exemption for a financial year is Rs 3500 (for individual accounts) and Rs 7000 (for joint accounts). This compensates for the cancellation of the deduction under section 80TTA pertaining to interest from bank and post office savings accounts.
Related: Tax-saving components of your CTC
2. Gratuity received from the employer
Gratuity received from one’s employer is completely exempt from tax for government employees. In the case of other employees, lifetime gratuity receipts are tax-exempt up to Rs 20 lakh. On the other hand, gratuity received on the death of an employee is tax-free with no maximum limit on the amount.
3. Interest from Provident Fund
The new tax regime will continue the tax exemption on interest received against your Employee Provident Fund account. However, this exemption is not available for interest income that exceeds 9.5% per annum. So, if you are receiving 10% interest against your EPF deposits, 0.5% of it will be taxable.
4. Life insurance maturity receipt
The amount received on maturity of life insurance policies will be tax-free under section 10(10D). Notably, the premium paid on the same will no longer be a tax benefit after the exclusion of Section 80C.
5. Employer's contribution to EPF/NPS account
Contributions made by an employer towards EPF, NPS and/or superannuation fund of employees is tax-free. However, for the purpose of tax exemption, the limit of the contribution made by the employer in all of these accounts for a financial year is Rs 7.5 lakh. Thus, the overall limit will impact only employees earning more than Rs 60 lakh a year. Besides, the limit on the superannuation account alone is Rs 1.5 lakh in one financial year. The employer's contribution to EPF will remain at 12% of the employee’s basic monthly salary. In the case of NPS, an employer will be able to contribute 10% of the basic salary to the NPS tier-I account.
6. PPF maturity proceeds and interest
The new tax regime will continue to allow tax exemption on the amount received on the maturity of a PPF account. The interest earned thereon will also be exempt from tax. After the cancellation of the deductions, you will not be able to claim deduction on the amount invested in PPF account annually.
7. Payment from Sukanya Samriddhi Yojana
In an exemption akin to that offered on PPF, the maturity amount and interest earnings from the SSY scheme is exempt from tax. SSY contribution was eligible for tax benefit under section 80C, which is now no longer available.
8. Gifts from employer
Continuing with the existing regime, the new regime also allows a gift of up to Rs 5000 from the employer.
9. Food coupons
In the absence of any declaration on the subject of food coupons received from the employer, these would continue to be tax-exempt to the extent of Rs 50 per meal and two meals a day. Currently, further clarification from the government on this matter is pending.
10. Payment against NPS account
The amount received on the maturity of NPS account is exempt from tax. However, only 60% of the corpus can be withdrawn on maturity; the remaining 40% has to be invested in annuity plans. The new regime also allows tax-free partial withdrawals from one's NPS tier-1 account.
11. Leave encashment on retirement
Any payment received by a retiring employee against unused leave is free from tax. In the case of a state or central government employee, the entire amount received on retirement or resignation is exempt from tax. The limit on the exemption in case of non-government employees is Rs 3 lakh.
12. Receipts of the voluntary retirement scheme
There is an Rs 5 lakh tax exemption on amounts received from the voluntary retirement scheme. This benefit was available in the old tax regime and is being carried over to the new regime as well.
13. Pension commutation
The lump sum portion of retirement amount is exempt from tax, subject to certain limits. In case gratuity is received, one-third of the pension amount can be received tax-free; while half of it can be received if there is no gratuity amount on retirement. This partial exemption is not applicable for government employees as the entire commuted amount is tax-free in their case.
In her budget presentation speech, the Finance Minister pointed out that the new tax regime is actually financially beneficial for taxpayers, despite the exclusion of deductions and exemptions. Clearly, while the old regime offers the benefits of certain deductions and exemptions, the new regime hopes to attract the taxpayer with reduced tax rates and ease of compliance.
The actual financial benefit derived from choosing between the two regimes will vary on a case-to-case basis. As a taxpayer, you will have to calculate and compare your taxable income and tax liability under both the regimes before opting for the one that benefits you the most. For a more comprehensive understanding, take a look at the difference between Tax Exemption, Tax Deduction and Tax Rebate.