Budget 2020: Is proposed simplified income tax mechanism beneficial to individuals?

Updated: February 3, 2020 11:49:58 AM

Budget 2020: Given that the overall tax would vary based on quantum of deductions / exemptions, an individual would need to evaluate the tax liability under both the alternatives and make appropriate choice.

budget 2020, budget 2020 proposals, income tax, new income tax slabs and rates, budget 2020 proposals for individual taxpayers, deductions, exemptions, PF, NPSBudget 2020: While the income tax rates have been reduced, under the proposed simplified tax mechanism, the impact of removal of deductions / exemptions would need to be factored.

Budget 2020: The Honourable Finance Minister has made a bold move by proposing a simplified tax mechanism for individuals which would be optional in their hands. Currently, individuals are eligible for various exemptions and deductions, whereas, under the proposed simplified tax mechanism, most of the deductions / exemptions have been taken away. Thus, while the tax rates have been reduced, under the proposed simplified tax mechanism, the impact of removal of deductions / exemptions would need to be factored.

Individuals opting to pay taxes as per the proposed simplified tax mechanism would forgo most deductions / exemptions including standard deduction on salary, professional tax, HRA exemption, Chapter VI A deduction (children school fee, housing loan principal repayment, life insurance premium, contribution to recognised provident fund, medical insurance premium, qualifying donations, etc.) Further, interest paid on housing loan against self-occupied property and losses carried forward from the previous years are not eligible for set-off. The only deduction available under Chapter VI A for a salaried employee would be employer’s contribution towards notified pension scheme.

At the time of filing the tax return, individual would have to make a choice between the current tax mechanism and the proposed simplified tax mechanism. Once the individual has made the choice and filed the tax return, no change is permissible for that year. However, individuals with no business income can exercise the choice afresh every year. As regards individual having business income, the choice once made is applicable for subsequent years with one time life time option to change. Further, once the individual ceases to have business income, choice again to be exercised on a yearly basis.

Given that the overall tax would vary based on quantum of deductions / exemptions, an individual would need to evaluate the tax liability under both the alternatives and make appropriate choice.

For instance, if an individual has a gross salary income of Rs 1,500,000 and incurs rental expenses of Rs 15,000 per month, contributing to provident fund to the extent of Rs 150,000, employee’s contribution to National Pension Scheme of Rs 50,000 and health insurance premium of Rs 20,000, the tax liability would be Rs 150,570 (inclusive of health and education cess) under the current tax mechanism. However, under the proposed simplified tax mechanism, the tax liability would be Rs 195,000 (inclusive of health and education cess). Thus in this instance, there would be a tax saving of Rs 44,430 by not availing the proposed simplified tax mechanism.

An indicative tabulation of different income levels has been provided along with the maximum threshold of exemptions, deductions and set off entitlement, up to which the simplified tax mechanism would be beneficial to an individual.

For income below Rs 500,000, the current tax mechanism would be always beneficial. However, for individuals with income above Rs 500,000 and who are not eligible for any deduction or exemption, they would clearly benefit from the proposed simplified tax mechanism.

Given the above complexities, an individual may not be able to make the choice on his own. Hopefully, the Income Tax Department would come up with a tool which could be used by an individual for self-evaluation.

(By Aarti Raote, Partner, Deloitte India, with Suresh Kumar, Director, and Vinod Raj, Deputy Manager, Deloitte Haskins and Sells LLP)

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