Budget 2020 has unveiled a new income tax slab and new tax rates for Individuals and a HUF. The new tax rate shall apply with a condition that no exemption and deduction can be claimed. However, the new tax regime for individuals and HUFs are optional.
New income tax rate and new income tax slab for AY 2021-22 under the new tax regime for individuals and HUF introduced by the Union Budget 2020.
Extract of Finance Minister speech during her budget presentation-
"In order to provide significant relief to the individual taxpayers and to simplify the income-tax law, I propose to bring a new and simplified personal income tax regime wherein income tax rates will be significantly reduced for the individual taxpayers who forgo certain deductions and exemptions," the FM said in her speech.
With this, a new tax system is ushered in the Indian economy which denies any deduction and exemption.
Budget 2020 has offered taxpayers the option to choose between the existing income tax regime and a new regime with slashed income tax rates and new income tax slabs but without any tax deduction and exemptions.
While presenting the Union Budget 2020, the Finance Minister Nirmala Sitharaman announced cuts in income tax rates. The rates are part of a new income tax regime that Sitharaman said will lower the income tax a salaried individual pays.
To give effect to the new tax regime, a new section 115BAC is inserted in the Income Tax Act, 1961 with effect from the assessment year 2021-22.
As per section 115BAC, an Individual or a HUF shall compute his tax liability on the total income as per the following table-
Table-1
Sl. No.
|
Total income
|
Rate of tax
|
1.
|
Upto Rs 2,50,000
|
Nil
|
2.
|
From Rs 2,50,001 to Rs 5,00,000
|
5 percent
|
3.
|
From Rs 5,00,001 to Rs 7,50,000
|
10 percent
|
4.
|
From Rs 7,50,001 to Rs 10,00,000
|
15 percent
|
5.
|
From Rs 10,00,001 to Rs 12,50,000
|
20 percent
|
6.
|
From Rs 12,50,001 to Rs 15,00,000
|
25 percent
|
7.
|
Above Rs 15,00,000
|
30 percent
|
Under the new tax regime, tax liability of an Individual and a HUF shall be computed based on the above table as per his income slab and rate of tax. The slab increases by Rs. 2.50 lakh.
Note: There seems to be a drafting lacuna in the income tax slab and tax rate table as mentioned in section 115BAC. Though the intention is to prescribe slab based rate of tax but the table suggests it is a flat rate based taxation. If total income is assumed to be Rs. 6,00,000 it straight forward falls in serial no. 3 of the above table and the corresponding rate of tax is 10 percent which computes the tax liability to Rs 60,000. On the contrary, if the tax is computed on the slab rate basis, then income-tax on Rs 6 lakh will come to Rs, 22,500.
Section 115BAC is optional. It means a taxpayer may or may not follow it. If a taxpayer does not wish to follow the new simplified tax regime, as it is called, he may choose to pay the income tax on total income as per existing income tax rates which are given below-
Please note that there is no change in the income slab and income tax rate under the existing or old regime compared to the preceding assessment year 2020-21.
Applicable Income Tax Slab Rates for AY 2021-22 for Individuals/HUF/AoP/BoI/AJP:
Table-2
Category of Taxpayer
|
Individual/HUF/AoP/BoI/AJP
|
Residential Status
|
Resident and Non-Resident
|
Age of the Taxpayer
|
Under 60 years of age
|
Total Income
|
Income-Tax Rate
|
Up to Rs. 2,50,000
|
Nil
|
Rs. 2,50,001 to Rs. 5,00,000
|
5%
|
Rs. 5,00,001 to Rs. 10,00,000
|
20%
|
Above Rs. 10,00,000
|
30%
|
Table-3
Category of Taxpayer
|
Individual (Senior Citizen)
|
Residential Status
|
Resident
|
Age of the Taxpayer
|
Above 60 years of age
|
Total Income
|
Income-Tax Rate
|
Up to Rs. 3,00,000
|
Nil
|
Rs. 3,00,001 to Rs. 5,00,000
|
5%
|
Rs. 5,00,001 to Rs. 10,00,000
|
20%
|
Above Rs. 10,00,000
|
30%
|
Table-4
Category of Taxpayer
|
Individual (Super Senior Citizen)
|
Residential Status
|
Resident
|
Age of the Taxpayer
|
Above 80 years of age
|
Total Income
|
Income-Tax Rate
|
Up to Rs. 5,00,000
|
Nil
|
Rs. 5,00,001 to Rs. 10,00,000
|
20%
|
Above Rs. 10,00,000
|
30%
|
Remarks: A Non-Resident Senior Citizen or a Very Senior Citizen Individual is not entitled to additional relief on income-tax slab rates. Only a Resident Senior Citizen or a Very Senior Citizen Individual is entitled to additional relief on income-tax slab rates.
Surcharge on Income Tax for AY 2021-22 for all the cases covered in Table 1 to Table 4 mentioned above-
Sl
|
Quantum of Total Income
|
Rate of Surcharge
|
(a)
|
Where the total income (including
the income under the provisions of section 111A and section 112A ) exceeds
Rs. 50 Lakh but does not exceed Rs. 1.0 Crore
|
10%
|
(b)
|
Where the total income (including
the income under the provisions of section 111A and section 112A) exceeds Rs.
1.0 Crore but does not exceed Rs. 2.0 Crore
|
15
%
|
(c)
|
Where the total income
(excluding the income under the provisions of section 111A and section 112A)
exceeds Rs. 2.0 Crore but does not exceed Rs. 5.0 Crore
|
25
%
|
(d)
|
Where the total income (excluding
the income under the provisions of section 111A and section 112A) exceeds Rs.
5.0 Crore
|
37%
|
(e)
|
Where the total income (including
the income under the provisions of section 111A and section 112A) exceeds Rs.
2.0 Crore, but is not covered under clauses (c) and (d)
|
15%
|
Marginal relief from the surcharge is available.
Health & Education Cess on Income Tax and Surcharge for AY 2021-22 for all the cases covered in Table 1 to Table 4 mentioned above-
Health
& Education Cess on Income-tax and Surcharge for Individuals/
HUF/AoP/BoI/AJP:
|
In all cases covering
Table-1/2/3/4 above
|
Health
& Education Cess
|
4%
|
Rebate u/s 87A is allowed on the tax liability to a resident Individual if Total Income does not exceed Rs. 5,00,000. The maximum amount of rebate is Rs. 12,500. This rebate is not allowed to a non-resident and persons other than Individual.
The good news is that this rebate of Rs. 12,500 will be available under the new tax regime also. It was already available for the old tax regime.
The effective tax rate for individuals with taxable income up to Rs 5 lakh would be nil under both the new and the existing tax regime as these individuals would be able to avail the tax-benefit of rebate up to Rs 12,500 under Section 87A under both the regimes.
After comparing the tax rate chart and the income tax slab under the old tax regime and the new tax regime, it is time to analyze whether the new tax regime is really beneficial to an Individual.
Is New Income Tax Slab Rate for Individuals after Budget 2020 is Really Beneficial
Previously, taxpayers paid 20% for incomes between Rs 5-10 lakh and 30% for incomes between Rs 10-15 lakh.
Income below Rs 2.50 lakh will continue to remain exempt while income between Rs 2.50 to Rs. 5 lakh will continue to get a rebate.
However, the methodology of computing income under the existing regime and the new regime are different. An income of Rs. 6.50 lakh in the old regime may not equal under the new regime.
Under the old regime of tax, exemptions and deduction are available from the gross income whereas no exemption or deduction is available under the new tax regime.
The above income may reduce to Rs. 5 Lakh in the old regime if an investment of Rs. 1.50 lakh u/s 80C is made. However, there is no scope of claiming deduction u/s 80C in the new tax regime.
Under the old tax regime tax will be computed on total income of Rs. 5 Lakh which will come to Nil due to rebate. However, in the new tax regime, the tax will be computed on Rs. 6.50 lakh and since the total income exceeds Rs. 5 lakh, no rebate will be allowed.
One needs to compute and analyze the effect of tax liability on his total income with or without taking the deduction and then opt for the old regime of taxation or the new regime of taxation.
There is no fixed formula to take the decision and one should compute his own tax liability under both the regimes before opting. The math is simple. Remember one may adopt and exit from the new scheme in any year as per his wish. Such flexibility is given in the law. However, such flexibility is only available if the taxpayer has no business income.
Please remember that all the exemptions have not been not withdrawn. Only the specified exemptions in section 115BAC are not available. Rests are available in the new scheme too.
Exemptions and deductions which are not available under the new scheme
Section
|
Particulars
|
Section 10(5)
|
Exemption for Leave Travel Allowance
|
Section 10(13A)
|
Exemption for House Rent allowance
|
Section 10(14)
|
Exemption from any other allowance
|
Section 10(17)
|
Exemption from allowance to MPs or MLAs
|
Section 10(32)
|
Exemption of Rs. 1,500 in case of clubbing of minor child income
|
Section 10AA
|
Exemption for newly established Units in Special Economic Zones
|
Section 16
|
Standard Deduction up to Rs. 50,000; Entertainment Allowance up to Rs. 5,000 and Professional Tax
|
Section 24(b)
|
Interest paid on home loan
|
Section 32(1)(iia)
|
Additional Depreciation
|
Section 32AD
|
Deduction for Investment in new plant or machinery in notified backward areas in certain States.
|
Section 33AB
|
Deduction for deposit into Tea development account, coffee development account and rubber development account
|
Section 33ABA
|
Deposit into Site Restoration fund
|
Section 35(2AA)
|
Deduction for expenditure on scientific research
|
Section 35(1)(ii)
|
Deduction for expenditure on scientific research
|
Section 35(1)(iia)
|
Deduction for expenditure on scientific research
|
Section 35(1)(iii)
|
Deduction for expenditure on scientific research
|
Section 35AD
|
Deduction in respect of expenditure on specified business
|
Section 35CCC
|
Deduction for expenditure on agricultural extension project
|
Section 57(iia)
|
Deduction from family pension income , equal to 33 1/3 per cent of such income or Rs. 15,000, whichever is less.
|
Deduction under Chapter VI-A
Except section 80CCD(2) and section 80JJA
|
Section 80C, Section 80D, Section 80CCD(1B), Section 80G, etc.
|
The following exemptions are still available even under the new scheme since they are not expressly prohibited in section 115BAC
Exemption
from Gratuity received
|
Commutations
of pensions
|
Leave
encashment on retirement or resignation
|
Withdrawals
and maturity amount from the National Pension Scheme
|
Interest
on Public Provident Fund, Employees Provident Fund, Sukanya Samridhi account,
etc
|
Maturity
proceeds of Life Insurance policies under specified circumstances
|
The above list is not exhaustive.
However, the Finance Minister Nirmala Sitharaman while presenting the Budget 2020 said that 70 out of 100 deductions available to taxpayers in the old regime will not be available in the new regime. Although taxpayers can choose to opt one of the other.
The extract of her budget speech is reproduced below-
"It was surprising to know that currently more than one hundred exemptions and deductions of different nature are provided in the Income-tax Act. I have removed around 70 of them in the new simplified regime. We will review and rationalize the remaining exemptions and deductions in the coming years with a view to further simplifying the tax system and lowering the tax rate."
It appears that section 115BAC will be amended in the coming years to increase the list of restricted exemptions and deductions.
Let us check the impact on tax liability on an individual's income at different levels.
As stated earlier, from AY 2021-22 an Individual can pay the tax under any one of the following two options, as per his choice-
(1) As per existing income tax rate and income slab after claiming all the available and eligible exemptions and deductions, or
(2) As per the new simplified income tax rate and income slab without claiming any of the specified exemptions and deduction.
One needs to carefully compute the tax liability under the given two options and shall decide in which option he will pay tax.
Generally, the thumb rule is that if one claims a maximum deduction, the existing tax slab and rate is more beneficial than the new tax regime.
Let us do some calculations.
In Case-I, one can substantially reduce his tax liability, in fact to Rs. Nil due to rebate u/s 87A as discussed above, by claiming a various deduction.
In Case-III, even though the income is the same under both the options and no deduction is claimed under old regime still, the tax liability is lower in the new regime due to the lower slab rate of tax prescribed from Rs. 5 lakh to Rs. 12.50 lakh.
However, if he claims deduction then the tax outgo will be lower in the old regime compared to new regime as shown in Case-II.
In Case-IV and Case-V, due to a change in the deduction amount claimed, the result has changed completely in opposite direction. In Case-IV, the deduction claimed is higher and hence lower tax amount in the old regime but in Case-V, the deduction amount is lower thus the tax outgo increased in the old regime compared to the new regime.
Case-VI shows the level of income where the tax outgo is same under both the options.
Hence, it can be concluded that the comparison is neither complex nor there involves any rocket-science to understand the calculation. The only problem a common man is facing about understanding the concept of dual regime of taxation for the same income.
As stated earlier, the computation shown above is hypothetical and for illustration only. In practical life, the old regime will give more benefits than the new regime. The benefits under the old tax scheme will accrue only to a handful of persons.
The Finance Minister in her budget speech stated that the new personal income tax rates will entail an estimated revenue foregone of Rs 40,000 crore per year. She cited an example where an individual earning an annual income of Rs. 15,00,000 will pay a lesser tax in the new regime compared to the existing tax regime.
She mentioned that a person earning Rs 15 lakh in a year and not availing any deductions etc. will pay only Rs, 1,95,000 as compared to Rs, 2,73,000 in the old regime. Thus his tax burden shall be reduced by 78,000 in the new regime. He would still be a gainer in the new regime even if he was taking a deduction of Rs 1.5 lakh under various sections of Chapter VI –A of the Income Tax Act under the old regime.
Problem in intimating employer for TDS: One more problem an Individual may face more particularly if he is a salaried person. In this case, he needs to intimate his employer about the option he wishes to opt for the purpose of TDS. The timing of intimating the employer will become more crucial in the new tax regime though the law allows him to exercise the option at the time of filing of return. Proper planning of income and tax should be required to be made at the beginning of the year to avoid any undue hardship at a later stage.
No benefit given to senior or very senior citizens: Remember, the new scheme of tax is governed by section 115BAC of the Income Tax Act, 1961 which is a self-contained code. The section prescribes the imposition of tax on individuals and HUF based on the income tax slab and income tax rate table given in the section itself. No distinction is made among the individuals as a senior on a very senior or a non-senior citizen taxpayer. Hence, all the individuals are treated similarly irrespective of their age and the basic exemption limit will be Rs. 2,50,000 in all cases. The new scheme is more adversarial to senior and very senior citizens.
When and how to exercise the option
Remember, the option to pay tax under the new scheme is not the default one. One has to exercise this option to avail of the benefits of a lower or concessional tax rate under the new scheme.
If a person does not exercise any option he will continue to be liable to pay tax under the existing scheme of tax.
Further, the rule for exercising the option is different for an individual (or HUF) having business income compared to an individual having no business income.
In case of a person having no business income, it includes a salaried individual, the exercising of the option is an annual exercise. Such a person has given the flexibility to opt or not to opt for the new scheme in a particular year. Such a person can exercise the option in one year and can exit from the option next year and can re-enter in the new scheme in a later year.
Hence, a salaried individual or a person having no business income has to compute the tax liability under both the option every year to ascertain his or her lower tax option. It has now become an annual exercise.
Salaried person having F&O business income: A salaried individual having income from the future and option trading will face much complexity since the income or loss from F & O trading will come under the head 'business income'. In this case, the below-mentioned rule will be applicable.
The rule to exercise the option under the new scheme is different for a person having a business income. In this case, a person once exercised shall apply to every subsequent assessment year. He has no choice in the subsequent year. If in any year he claims deduction he will be out of this scheme and cannot re-enter into this scheme in any later year. The rule allows such a person to withdraw the option once in a lifetime. Once withdrawn, he cannot re-enter the new scheme and he has to continue in the old or existing scheme only. He will not have any choice.
It is not necessary to exercise the option in the AY 2021-22. It can be exercised at any time for any assessment year on or after 2021-22.
Conclusion
From the above analysis, it appears that the simplified new tax regime only manages the headline and not beneficial practically. It is actually how one interprets a half-filled glass.
Is the glass half-filled or half-empty? The case is the same. In fact, practically there is no change in the income tax slab and rate of tax for an individual for AY 2021-22. The so-called simplified tax regime can benefit meager taxpayers but not at large. It is simplified only in the discussion tables and not beyond that.
Suggested
Readings on Section 115BAC
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