- Date : 02/02/2020
- Read: 5 mins
Union Budget 2020 proposals on Income Tax includes a new personal tax regime and reduced tax rates
The Union Budget’s proposals on income tax structure is one of the most eagerly anticipated sections, for the simple reason that it directly impacts the finances of the common people, unlike schemes and sectorial allocations that cascade down to households more gradually.
At an alarming situation, when the national economy is stagnant, Union Budget 2020 proposed some significant changes to personal tax structure. This includes
- An alternative tax regime
- Slashed tax rates
- Simplified tax assessment
Related: Income Tax In India: An Interesting History
An attempt to simplify taxes
Finance Minister, Ms Nirmala Sitharaman proposed a new personal tax regime, which will feature a reduced rate of income tax but will also reduce the number of exemptions and deductions. In fact, Ms Sitharaman said that all of the 100 odd exemptions/deductions in the Act were reviewed and nearly 70 of them were removed in the new regime, to ensure simplicity. This new regime, however, is optional, which means that taxpayers can choose to assess their tax liability within the existing regime as well. Ms Sitharaman said that the government will forego an income tax revenue of Rs 40,000 crore, although one may argue that the revenue actually lost would depend on how many people opt for the new structure and how many don’t.
Income tax slab under the new personal tax regime:
- For income up to 2.5 lakhs – no taxes (no change)
- For income between 2.5 to 5 lakhs – no taxes (down from 5%) *
- For income between 5 to 7.5 lakhs – 10% (down from 20%)
- For income between 7.5 to 10 lakhs – 15% (down from 20%)
- For income between 10 to 12.5 lakhs – 20% (down from 30%)
- For income between 12.5 to 15 lakhs – 25% (down from 30%)
- For income above 15 lakhs – 30% (no change)
The above comparison is applicable for citizens up to the age of 60. Under the present tax regime, there is no tax liability up to Rs 3 lakhs, in case of citizens between the age 60 and 80. Similarly, there is no tax liability up to Rs 5 lakhs for super-senior citizens, aged 80 and above.
*In the existing regime, if the net taxable income is below 5 lakhs, the 5% tax is waived off through a tax rebate. Thus, the tax on income between 2.5 to 5 lakhs effectively becomes nil, if net taxable income is below 5 lakhs.
Related: Difference Between Tax Exemption, Tax Deduction And Tax Rebate
Understanding the new income tax regime
To better explain the new tax regime, the Finance Minister offered an example of a person earning Rs 15 lakhs per annum. If the person opts for the new regime, the tax liability will amount to Rs 1.95 lakhs. In the existing regime, the tax liability would be Rs 2.73 lakhs, assuming the person has no exemptions and deductions to claim. Studying this example further, if the person claims deductions under sections 80C and 80D alone (1.5 + 0.5 lakhs) the tax liability reduces from 2.73 to Rs 2.1 lakhs.
If we consider all the deductions and exemptions, such as house rent allowance, 80C deductions, deduction on medical insurance and higher study loans, interest on a home loan, etc., we may face the dilemma of whether or not to use the tax planning option offered in the old regime. The Finance Minister also informed that the remaining exemptions will be reviewed in the coming days. The actual benefit to the taxpayer can be calculated only after considering the deductions and exemptions in both regimes.
What does the new regime mean for taxpayers?
A lower tax liability leaves taxpayers with more money at their disposal, fewer tax deductions, more in-hand salary and more money in the economy in general. This, in turn, can address the demand stagnation that is stunting the economy at the moment.
The last time personal tax saw a sea of changes was during the 2014 budget, with only minor changes in the budgets that followed. Whether there will be substantial benefit permeating to the taxpayer, is left to be seen in the finer details.
On the administrative side of Income Tax, the Finance Minister highlighted the Vivaad Se Viswaas scheme, which is designed to address a large number of direct tax disputes lying at various tax forums. This scheme offers a settlement of these disputes through the payment of the disputed amount only and waives off the penalty and interest portions. Continuing with the digitisation of tax administration, the previous budget’s faceless assessment is followed up this time by “faceless appeal” which will encourage further use of technology. The Finance Minister also confirmed that pre-filled ITR will feature in the ITR forms under the new tax regime as well. These steps are expected to further simplify compliance formalities for the common person. To have sound financial security, have a look at some tax-saving instruments that you can invest in.
The Union Budget’s proposals on income tax structure is one of the most eagerly anticipated sections, for the simple reason that it directly impacts the finances of the common people, unlike schemes and sectorial allocations that cascade down to households more gradually.
At an alarming situation, when the national economy is stagnant, Union Budget 2020 proposed some significant changes to personal tax structure. This includes
- An alternative tax regime
- Slashed tax rates
- Simplified tax assessment
Related: Income Tax In India: An Interesting History
An attempt to simplify taxes
Finance Minister, Ms Nirmala Sitharaman proposed a new personal tax regime, which will feature a reduced rate of income tax but will also reduce the number of exemptions and deductions. In fact, Ms Sitharaman said that all of the 100 odd exemptions/deductions in the Act were reviewed and nearly 70 of them were removed in the new regime, to ensure simplicity. This new regime, however, is optional, which means that taxpayers can choose to assess their tax liability within the existing regime as well. Ms Sitharaman said that the government will forego an income tax revenue of Rs 40,000 crore, although one may argue that the revenue actually lost would depend on how many people opt for the new structure and how many don’t.
Income tax slab under the new personal tax regime:
- For income up to 2.5 lakhs – no taxes (no change)
- For income between 2.5 to 5 lakhs – no taxes (down from 5%) *
- For income between 5 to 7.5 lakhs – 10% (down from 20%)
- For income between 7.5 to 10 lakhs – 15% (down from 20%)
- For income between 10 to 12.5 lakhs – 20% (down from 30%)
- For income between 12.5 to 15 lakhs – 25% (down from 30%)
- For income above 15 lakhs – 30% (no change)
The above comparison is applicable for citizens up to the age of 60. Under the present tax regime, there is no tax liability up to Rs 3 lakhs, in case of citizens between the age 60 and 80. Similarly, there is no tax liability up to Rs 5 lakhs for super-senior citizens, aged 80 and above.
*In the existing regime, if the net taxable income is below 5 lakhs, the 5% tax is waived off through a tax rebate. Thus, the tax on income between 2.5 to 5 lakhs effectively becomes nil, if net taxable income is below 5 lakhs.
Related: Difference Between Tax Exemption, Tax Deduction And Tax Rebate
Understanding the new income tax regime
To better explain the new tax regime, the Finance Minister offered an example of a person earning Rs 15 lakhs per annum. If the person opts for the new regime, the tax liability will amount to Rs 1.95 lakhs. In the existing regime, the tax liability would be Rs 2.73 lakhs, assuming the person has no exemptions and deductions to claim. Studying this example further, if the person claims deductions under sections 80C and 80D alone (1.5 + 0.5 lakhs) the tax liability reduces from 2.73 to Rs 2.1 lakhs.
If we consider all the deductions and exemptions, such as house rent allowance, 80C deductions, deduction on medical insurance and higher study loans, interest on a home loan, etc., we may face the dilemma of whether or not to use the tax planning option offered in the old regime. The Finance Minister also informed that the remaining exemptions will be reviewed in the coming days. The actual benefit to the taxpayer can be calculated only after considering the deductions and exemptions in both regimes.
What does the new regime mean for taxpayers?
A lower tax liability leaves taxpayers with more money at their disposal, fewer tax deductions, more in-hand salary and more money in the economy in general. This, in turn, can address the demand stagnation that is stunting the economy at the moment.
The last time personal tax saw a sea of changes was during the 2014 budget, with only minor changes in the budgets that followed. Whether there will be substantial benefit permeating to the taxpayer, is left to be seen in the finer details.
On the administrative side of Income Tax, the Finance Minister highlighted the Vivaad Se Viswaas scheme, which is designed to address a large number of direct tax disputes lying at various tax forums. This scheme offers a settlement of these disputes through the payment of the disputed amount only and waives off the penalty and interest portions. Continuing with the digitisation of tax administration, the previous budget’s faceless assessment is followed up this time by “faceless appeal” which will encourage further use of technology. The Finance Minister also confirmed that pre-filled ITR will feature in the ITR forms under the new tax regime as well. These steps are expected to further simplify compliance formalities for the common person. To have sound financial security, have a look at some tax-saving instruments that you can invest in.
