There were wide expectations leading up to the announcement of the Union Budget for the next fiscal that, Finance Minister would provide relief to salaried taxpayers like she did to the corporates a few months ago. For quite some time now, the government has also been hinting towards simplification of Income tax regime in India to make compliance easier and also to bring more people under the tax net. Two hours into the budget speech, FM finally came to the widely anticipated subject and announced series of changes and reductions in personal income tax slabs.
As per the government estimates, the new personal income tax rates, which would bring ‘Substantial benefits’ for the taxpayer, will entail estimated revenue loss worth Rs 40,000 crore per year to the government. However, as the FM kept listing the details, it became apparent that the new income tax regime would be optional and those who opt for it would have to forego majority of exemptions and deductions that they avail under the current regime. This of course makes matters more complicated compared to a simple rate rationalisation. So let’s try and understand what the new income tax regime means, what benefits it brings for the taxpayers, who should opt for it, and who should stick to the old regime.
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The New Income Tax Regime: This proposed new tax regime introduces new tax slabs with lower tax incidence in each of them while increasing the threshold of the highest tax slab of 30% to income beyond Rs 15 lakh as opposed to Rs 10 lakh earlier. It makes no changes to the two slabs below Rs 5 lakh, so the income up to Rs 2.5 lakh remains tax free and that between Rs 2.5 lakh and Rs 5 lakh would be taxed @5%. Ofcourse, for those whose income does not exceed Rs 5 lakh they would get exempted from paying any tax despite falling in the 5% slab. The 5% rate would only apply to those whose income exceeds beyond Rs 5 lakh, this continues to be so in both regimes.
However, income between Rs 5 lakh and Rs 10 lakh, which in the earlier regime was taxed @ 20%, would have a significantly lower tax incidence under the new regime as this slab has been divided into two new slabs ie, Rs 5 lakh to Rs 7.5 lakh and Rs 7.5 lakh to Rs 10 lakh. Income between Rs 5 lakh to Rs 7.5 lakh will be taxed @10%, while income between Rs 7.5 lakh to Rs 10 lakh would be taxed @ 15%. This translates to reduction in tax liability of roughly Rs 22,500 for those with income up to Rs 7.5 lakh and Rs 37,500 for those with income up to Rs 10 lakh. However, the catch is that they would have to let go of all deductions and exemptions including standard deduction, HRA benefit, Section 80C and 80D deductions as well as deduction available on Home Loan interest u/s 24 of the Income Tax Act. So depending on how much each individual saves and invests in tax savings schemes and whether the taxpayer has taken a home loan, the effective savings under the new regime would be much lower.
For example, someone with an income up to Rs 7.5 lakh, who claims the entire Rs 1.5 lakh deduction available u/s 80C, will have to pay Rs 37,500 under the new regime (excluding cess) as opposed to only Rs 22,500 in the old regime. This means that instead of saving tax, the taxpayer would have an extra tax liability of Rs 15,600. This would become even higher if the individual is claiming deductions under other sections as well. This is because of the fact that in the old regime, after claiming deductions the taxable income itself becomes lower. So, even a higher tax rate on lower income base results in lower tax liability.
Regarding income above Rs 10 lakh, which is taxed at flat rate of 30% under the current regime, the FM has created three new slabs ie, Rs 10 lakh to Rs 12.5 lakh, Rs 12.5 lakh to Rs 15 lakh, and above Rs 15 lakh. While the income between Rs 10 lakh and Rs 12.5 lakh would be taxed @20%, income between Rs 12.5 lakh and Rs 15 lakh would incur tax rate of 25%. All income above Rs 15 lakh would be taxed @30%. Without considering any deductions, this essentially means a saving of roughly Rs 62,500 for those with income up to Rs 12.5 lakh and Rs 75,000 for income up to Rs 15 lakh. This would go up to Rs 65,000 and Rs 78,000 respectively after including cess. However, since one would let go of all deductions and exemptions, the actual impact would be much lower and in certain cases could even lead to a higher tax outgo.
So in a nutshell one would have to do a comparative analysis in each individual case to understand which regime works out to be beneficial from tax saving point of view. The significant point to be noted in all this is that, once the taxpayer shifts to the new tax regime, he/ she cannot revert back to the old regime in the following years.
Einstein once famously quoted, “The hardest thing to understand in the world is the Income Tax.” Looking at the permutations and combinations for the given set of tax brackets along with its application on the current and the new income tax regime, the taxpayer has certainly got his/her task cut out. So, be ready to rack your brains and do some number crunching on your calculators and computers to come up with a working that justifies which regime suits you the best.
