Incomes that will be tax-free under the new tax structure

Earning incomes from these income sources will not attract any tax liability in the hands of the taxpayer

Incomes that will be tax-free under the new tax structure

Along with the 70-odd tax deductions and exemptions that are being done away with by the new tax regime, there are several income heads that have been totally exempted from income tax. This is in addition to the reduced rate of tax that is proposed to be charged under the new income tax structure. 

However, taxpayers have a choice. They can opt for either the existing tax regime or the new one. If you’re planning to ring in the new, bear in mind that you will not be able to claim tax benefits against investments such as the ones made under section 80C or health insurance premium paid under section 80D.

Maturity benefits received from NPS accounts were tax-free under the old regime and they will continue to remain so under the new regime as well. According to the existing tax rules, up to 60% withdrawal can be made from the accumulated NPS Tier-1 corpus on maturity, without paying tax. The remaining 40% must mandatorily be invested in annuity plans upon the maturity of the NPS account. 

Coming to withdrawals, a person can withdraw up to 25% of his or her contribution from the NPS account without having to pay tax. Thus, the payment received in case of both maturity and partial withdrawal, albeit up to a certain limit, is exempt from tax. As for contributions, an employee’s contribution to the NPS account is no longer eligible for a tax benefit. However, a deduction can be claimed on the employer’s contribution under section 80CCD(2).

Related: Key highlights of Budget 2020

Let’s now look at some more key components of the new tax regime:

1. Gratuity received from employer: Subject to specified upper limits, the gratuity received by an employee from the employer is also exempt from income tax. In the case of non-government employees, gratuity receipts of up to Rs 20 lakh during the lifetime of the employee is exempt from income tax. However, in the case of government employees, gratuity received is entirely exempt from income tax, irrespective of the amount. Similarly, gratuity received in case of the death of an employee is also exempt from income tax; this isn’t subject to any upper limit.  

2. Commuted pension: Commuted pension is a portion of the pension fund that is received under a single receipt instead of the periodic payment. Its taxation will remain the same in the new tax regime. In case of non-government staff, if an employee receives gratuity, one-third of the commuted pension is exempt from tax. If no gratuity is received, half the commuted pension will be tax-free. 

3. Leave encashment: In case of non-government employees, any money received at the time of retirement, in lieu of leaves not availed of during the service period, will remain tax-free. However, this exemption is applicable only up to a maximum of Rs 3 lakh.

4. VRS amount: An employee retiring under the voluntary retirement scheme (VRS) is likely to receive monetary benefits if they opt for premature retirement. Such monetary benefit will be exempt from tax up to a maximum of Rs 5 lakh.

Related: Budget 2020: What’s in it for taxpayers?

5. Maturity receipts from a life insurance policy: Although the tax benefit previously available on the payment of life insurance policy premiums is now no longer available, the amount received against such policy on maturity remains tax-free. This exemption is available under section 10(10D). However, the section also requires that the sum assured under the policy should be at least 10 times more than the premium paid against the policy. 

6. Interest income on post office savings account: The interest income received against your post office savings account is exempt from income tax under section 10(15)(i) of the Income Tax Act. However, this interest income is exempt only up to Rs 3500 (in case of individual accounts) and Rs 7000 (in case of joint accounts). The exemption has to be claimed while calculating the gross taxable income under the head ‘Income from Other Sources’. Section 80TTA which provided a deduction of Rs 10,000 on the interest income from all savings accounts will, however, become unavailable. 

7. Employer’s contribution to EPF/NPS account: Contributions made by the employer to the EPF/NPS or superannuation account of the employee is exempt from tax. However, the employer’s total contribution towards all these accounts should not exceed Rs 7.5 lakh in a financial year. Interests and gains arising from the excess contribution will be taxable in the hands of the employee.

Presently, employers can make an EPF contribution of a maximum of 12% of the employee’s basic monthly salary. The employer’s maximum contribution to the employee’s Tier-1 NPS account is 10% of the employee’s basic salary. An employer can contribute a maximum of Rs 1.5 lakh into the superannuation account of an employee. Effectively, highly paid employees will not be able to enjoy the full benefit of this exemption because of the Rs 7.5 lakh upper limit.

8. Interest on EPF: Interest income arising from your EPF account will continue to remain exempt from tax. However, the exemption is available only on interest up to 9.5% per annum.

9. Interest and maturity of PPF: The interest income that you earn out of your PPF account is exempt in the new tax regime. Besides, the maturity amount you receive when your PPF account matures is also exempt from tax. In the existing regime, the contribution made by the taxpayer to the PPF account was also exempt from tax, but this has been scrapped under the new regime.

Related: Budget 2020: What are the new schemes you need to know about?

10. Sukanya Samriddhi Yojana: Interest arising from this scheme meant for the girl child will continue to be exempt from tax even under the new tax regime. Payments received by the taxpayer from this scheme is also exempt from tax. And just like PPF, investments made in Sukanya Samridhi Yojana are no longer eligible for tax deduction after the scrapping of section 80C.

11. Gifts from employer: Gifts received from one’s employer up to a value of Rs 5000 will remain tax-free under the new regime. This rule has remained unchanged in both regimes.  

12. Food coupons: Food coupons received from employers are exempt from tax provided the value of the coupon is at least Rs 50 per meal. The exemption is available for not more than two meals in a day. The budget did carry an explanatory memorandum that proposed the scrapping of this tax exemption. This income exemption will need further clarification from the government.

In conclusion, it can be seen that several of the exempted incomes mentioned above have been continued from the previous regime! Understand new tax regime vs old tax regime and whether you should switch.