Union Budget for FY 2020/21- everything you need to know
Credit: North Loop
Early this year, the Finance Ministry announced the Union Budget for 2020, announcing a new tax regime for the financial year 2020-21. The Finance Ministry has given taxpayers an option to choose between the old tax regime and the new tax regime while filing taxes. The new tax regime has a reduced set of tax rates but has changed the number of investments you can claim as deductions. All changes pertaining to the tax rates have been uncovered below-
What are the current income tax slab rates?
As per the current slab rate, income tax is applicable as per the following-
Note- Here, any income that does not exceed Rs. 5 Lakh has a 100% rebate of the income-tax or Rs. 12,500, lesser of the two, under Sec 87A. An additional 4% education cess is applicable on these income slabs.
Incomes ranging between Rs. 50 Lakhs and Rs. 1 Crore have a surcharge of 10% on tax.
Incomes over Rs. 1 Crore has a surcharge of 15% on tax.
Incomes ranging between Rs. 2 Crore and Rs. 5 Crores have a surcharge of 25% on tax.
Incomes over Rs. 5 Crore has a surcharge of 37% on tax.
However, these slabs are applicable only after the taxpayer subtracts all applicable deductions and exemptions before calculating the total income.
| Income Tax Slab Rates (Current) | |
|---|---|
| Income Bracket (Rs.) | Current Tax Slab |
| Up to Rs. 2.5 Lakhs | NIL |
| Rs. 2.5 Lakhs to Rs. 5 Lakhs | 5% |
| Rs. 5 Lakhs to Rs. 10 Lakhs | Rs. 12,500 plus 20% of total income exceeding Rs. 5 Lakhs. |
| Above Rs. 10 Lakhs | Rs. 112,500 plus 30% of total income exceeding Rs. 10 Lakhs. |
Note- Here, any income that does not exceed Rs. 5 Lakh has a 100% rebate of the income-tax or Rs. 12,500, lesser of the two, under Sec 87A. An additional 4% education cess is applicable on these income slabs.
Incomes ranging between Rs. 50 Lakhs and Rs. 1 Crore have a surcharge of 10% on tax.
Incomes over Rs. 1 Crore has a surcharge of 15% on tax.
Incomes ranging between Rs. 2 Crore and Rs. 5 Crores have a surcharge of 25% on tax.
Incomes over Rs. 5 Crore has a surcharge of 37% on tax.
However, these slabs are applicable only after the taxpayer subtracts all applicable deductions and exemptions before calculating the total income.
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What is the proposed tax regime for FY 2020-21?
The new proposed tax regime for FY 2020-21 are below. Note that this updated tax structure allows lesser deductions and exemptions that a taxpayer can claim. However, the tax rates are relatively lesser than the current tax regime.
Note- Here, any income that does not exceed Rs. 5 Lakh has a 100% rebate of the income-tax or Rs. 12,500, lesser of the two, under Sec 87A.
Taxpayers have the liberty to choose between any of the regimes mentioned above while filing their taxes. However, which of the two regimes would be more beneficial for me? Let us look at a case by case analysis of these tax regimes at different income levels.
| Income Tax Slab Rates (Proposed for FY 2020/21) | |
|---|---|
| Income Bracket (Rs.) | Current Tax Slab |
| Up to Rs. 2.5 Lakhs | NIL |
| Rs. 2.5 Lakhs to Rs. 5 Lakhs | 5% |
| Rs. 5 Lakhs to Rs. 7.5 Lakhs | 10% |
| Rs. 7.5 Lakhs to Rs. 10 Lakhs | 15% |
| Rs. 10 Lakhs to Rs. 12.5 Lakhs | 20% |
| Rs. 12.5 Lakhs to Rs. 15 Lakhs | 25% |
| Above Rs. 15 Lakhs | 30% |
Note- Here, any income that does not exceed Rs. 5 Lakh has a 100% rebate of the income-tax or Rs. 12,500, lesser of the two, under Sec 87A.
Taxpayers have the liberty to choose between any of the regimes mentioned above while filing their taxes. However, which of the two regimes would be more beneficial for me? Let us look at a case by case analysis of these tax regimes at different income levels.
Case 1- You choose the newly proposed regime and do not claim any deductions or exemptions-
| Income Tax Slab Rates (Proposed for FY 2020/21) | |||
|---|---|---|---|
| Income Bracket (Rs.) | Tax payable under current tax regime | Tax payable under the new tax regime | Tax Saved Under New Regime |
| Rs. 7.5 Lakhs | Rs. 54,600 | Rs. 39,000 | Rs. 15,600 |
| Rs. 10 Lakhs | Rs. 106,600 | Rs. 78,000 | Rs. 28,600 |
| Rs. 12.5 Lakhs | Rs. 179,400 | Rs. 130,000 | Rs. 49,400 |
| Rs. 15 Lakhs | Rs. 257,400 | Rs. 195,000 | Rs. 62,400 |
| Rs. 20 Lakhs | Rs. 413,400 | Rs. 351,000 | Rs. 62,400 |
Here, you can observe that you pay significantly lower taxes when you do not claim any deductions or exemptions under the new proposed tax regime.
Case 2- You claim basic deductions and exemptions before calculating tax on your adjusted total income-
Basic deductions taken into account are- Standard deduction of Rs. 50,000, deduction of Rs. 1.5 Lakhs under Sec 80C and medical premium linked deductions under Sec 80D worth Rs. 25,000.
| Income Tax Slab Rates (Proposed for FY 2020/21) | ||||
|---|---|---|---|---|
| Income Bracket (Rs.) | Tax payable under current tax regime | Tax payable under the new tax regime | Tax Saved Under New Regime | Tax Saved Under Old Regime |
| Rs. 7.5 Lakhs | Rs. 18,200 | Rs. 39,000 | - | Rs. 20,800 |
| Rs. 10 Lakhs | Rs. 70,200 | Rs. 78,000 | - | Rs. 20,800 |
| Rs. 12.5 Lakhs | Rs. 124,800 | Rs. 130,000 | - | Rs. 5200 |
| Rs. 15 Lakhs | Rs. 202,800 | Rs. 195,000 | Rs. 7800 | - |
| Rs. 20 Lakhs | Rs. 358,800 | Rs. 351,000 | Rs. 7800 | - |
Case 3- You claim maximum deductions and exemptions before calculating tax on your adjusted total income-
| Income Tax Slab Rates (Proposed for FY 2020/21) | ||||
|---|---|---|---|---|
| Income Bracket (Rs.) | Tax payable under current tax regime | Tax payable under the new tax regime | Tax Saved Under New Regime | Tax Saved Under Old Regime |
| Rs. 7.5 Lakhs | Rs. 39,000 | - | Rs. 39,000 | |
| Rs. 10 Lakhs | Rs. 28,600 | Rs. 78,000 | - | Rs. 49,400 |
| Rs. 12.5 Lakhs | Rs. 70,200 | Rs. 130,000 | - | Rs. 59,800 |
| Rs. 15 Lakhs | Rs. 111,800 | Rs. 195,000 | - | Rs. 83,200 |
| Rs. 20 Lakhs | Rs. 234,000 | Rs. 351,000 | - | Rs. 117,000 |
A salaried employee that claims maximum deductions or exemptions can save more tax under the old regime, however, salaried employees can save more tax under the new regime provided he/she doesn’t claim any deductions or exemptions.
Certain deductions and exemptions included in the new tax structure include-
1. Interest accrued on post office savings account balance.
2. Gratuity received from employer.
3. Amount received upon Life Insurance maturity.
4. Payment received from NPS account.
5. Half of employee’s commuted pension.
2. Gratuity received from employer.
3. Amount received upon Life Insurance maturity.
4. Payment received from NPS account.
5. Half of employee’s commuted pension.
Certain deductions and exemptions excluded in the new tax structure include-
1. Standard deduction of Rs. 50,000.
2. House rent allowance.
3. Health insurance premium deduction.
4. Deductions under 80C.
5. Leave travel allowance.
2. House rent allowance.
3. Health insurance premium deduction.
4. Deductions under 80C.
5. Leave travel allowance.
Employers need to focus on educating employees about tax structures so that they can make the right decision. As an employee, it is important to be aware of the difference between the two tax regimes. You can then make a decision based on whether you claim deductions or not on your total tax liability.
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