Budget 2020 proposes to give taxpayers the option of paying taxes either as per the existing tax structure or forgo most tax exemptions and deductions to pay as per a new lower income tax rate regime. How can a salaried individual earning more than Rs 15 lakh, say Rs 20 lakh, decide if he/she should continue with the existing tax regime or opt for the new tax regime?
Shown below is a table that gives how many total deductions and tax-exemptions a person with a total salary income of Rs 20 lakh in a financial year should claim so that the individual’s tax-liability stays the same in both tax structures.
|
Particulars |
Existing Regime Tax payable |
New Regime Tax payable |
|
Basic Salary + DA |
7,77,200 |
7,77,200 |
|
Other Taxable Allowances |
12,22,800 |
12,22,800 |
|
Gross Salary |
12,22,800 |
12,22,800 |
|
Standard Deduction |
-50,000 |
- |
|
Income under the head salary |
19,50,000 |
20,00,000 |
|
Chapter VIA deductions |
-2,00,000 |
- |
|
Income under the head salary |
17,50,000 |
20,00,000 |
|
Income Tax (87A is NIL, Rebate u/s) |
3,37,500 |
3,37,500 |
|
|
13,500 |
13,500 |
|
Total tax, surcharge and education cess |
3,51,000 |
3,51,000 |
As shown in the table above, the amount of tax payable by the individual would be the same in both regimes if he/she manages to claim total deductions and/or exemptions of Rs 2.5 lakh. One thing an individual must keep in mind is that as one's income rises above Rs 15 lakh, the total amount of deductions and tax-exemptions that he/she must claim to pay the same tax amount in both regimes remains the same. This means that whether the individual’s income is Rs 20 lakh or Rs 15 lakh, the complete amount of tax-exemptions and deductions to claim in existing tax regime to remain at a neutral tax position vis-à-vis the new tax regime will remain at Rs 2.5 lakh.
To decide whether to choose for the new tax regime or not an individual with Rs 20 lakh income just needs to calculate the total amount of deductions and tax-exemptions that are currently claimed by him/her. If the total is equivalent to or exceeds Rs 2.5 lakh, then he/she would pay the same or less tax in the existing tax regime vis-à-vis the new regime. On the other hand, if the total tax-exemptions and deductions claimed are less than Rs 2.5 lakh, then the individual would be better off opting for the new tax regime. Therefore in this case, it won't be beneficial tax-wise to opt for the new tax-regime unless the individual's total deductions and tax-exemptions are less than Rs 2.5 lakh.
The figure of Rs 2.5 lakh can be arrived at by availing various deductions such as Section 80C, 80D, standard deduction etc. and tax-exemptions such house rent allowance (HRA), leave travel allowance (LTA) etc.
In the above example, standard deduction of Rs 50,000 (which is available to a salaried individual) and various deductions available under Chapter VI-A of the Income Tax Act have been considered. These deductions include: Section 80C deduction of maximum Rs 1.5 lakh, section 80D deduction for health insurance premiums paid and other deductions for which a taxpayer is eligible, section 80TTA deduction for interest received from a saving account held with bank or post office etc.
