Union Budget 2020: The NEW personal income tax (PIT) rate structure doesn’t really benefit an individual who makes use of all exemptions, an analysis by Nangia Andersen shows. For instance, tax liability for an individual with annual income of Rs 10 lakh in the current regime is Rs 16,120 after availing all exemptions such as those under Sections 80C, 80D, 80TTA, standard deduction and interest deduction on a self-occupied house. However, in the new regime the tax liability is a much higher Rs 78,000 since no exemptions are permitted except the employer’s contribution to National Pension System (NPS). That’s a difference of nearly Rs 62,000.
Tax experts say that, in particular, those individuals who have taken a home loan and enjoy exemptions on both the principal and the interest amount would be loathe to switch. Moreover, those opting for the new structure would not be eligible for leave travel allowance (LTA) concessions and benefits of house rent allowance (HRA). Shailesh Kumar, director, Nangia Andersen, observed that for individuals already availing full benefit for exemptions or deductions available, the new regime may actually result in increased tax liability leaving them with no benefit or incentive to opt for the new slab rates. “The option shall be beneficial for those who were not availing exemptions or deductions previously,” Kumar pointed out.
While the tax rates in the new structure are much lower—for an income between Rs 5 lakh and Rs 10 lakh, the 20% rate has been slashed to 10%-15%—the exemptions amounting to Rs 4.85 lakh per annum, in our example, would appear to help individuals get a bigger tax break. The existing cess—health and education of 4%—and the surcharges continue to be applicable for the new structure. The government will allow individuals and Hindu Undivided Families to either stay with the current structure or opt for the new one.
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In the new structure, an individual earning Rs 5-7.5 lakh and Rs 7.5-10 lakh will pay PIT at the rate of 10% and 15% respectively, against 20% currently. For income of Rs 10-12.5 lakh, the new tax rate will be 20% while for an income of Rs 12.5-15 lakh, it will be 25%; in the existing regime the rate for both slabs is 30% tax. Individuals making more than Rs 15 lakh will continue to pay 30% plus cess; those earning above Rs 50 lakh will pay the applicable surcharge.
Given exemptions, especially those under Section 80C, are very popular, tax experts say not too many individuals may want to shift to the new tax structure. The Section 80C exemption is Rs 1.5 lakh and includes savings in public provident fund (PPF), life insurance premiums and investments in equity linked saving schemes (ELSS) of mutual funds. An additional exemption of Rs 50, 000 under Section 80CCD is provided for contribution to NPS.
Akhil Chandna, director, Grant Thornton India LLP, said it was important to note that the reduced rates are optional and applicable only where certain deductions and exemptions are given up. Therefore, taxpayers will need to carefully review the deductions to be foregone and the benefit from opting for the new personal tax rate regime. The devil lies in the detail,” he said.