Cracking The Tax-2020 Code!

Finance Minister, Nirmala Sitaraman has announced the Union Budget for 2020 and proposed the new Income Tax regime with the revised tax slab and rates.

With this update, the individuals now have the opportunity to decide if he/she wants to follow the new regime or continue following the old one.   

Let’s dive into it in detail.

The individual taxpayers in India are classified into various slabs on the basis of their income. These tax slabs may vary every successive year with respect to the Union Budget. However, the categorization of the tax payers is the same as specified below: 

• Individuals (Below 60 years of age) 
• Senior Citizen (Above 60 years of age but below 80 years) 
• Super Senior Citizens (Above 80 years of age) 

So let’s now have a look over the new tax regime as per the Union Budget for 2020: 

New Tax Regime:

As specified below the new tax regime has increased the number of tax slabs and reduced the rates. The most vital update about the new regime is that the individuals will have fore go certain set of deductions while following the New Tax Regime. 

• For Individuals below the age of 60 years 

However, you are free to decide which regime to opt for!  

Old Regime Vs New Regime:

Before deciding which regime to opt for, let’s first look into how these differ and affect individuals of various income levels.  

Tax Slabs: 

According to the new regime, you can opt to pay tax at reduced rates without claiming for a certain set of exemptions and deductions.   

• In the new tax regime, you will not be able to claim all the deductions, as 70 out 100 exemptions have been abolished.  
• Here is the list of some common exemptions for a salaried individual that cannot be exempted in the new tax regime: 
• Deductions under section 16, Standard deduction of Rs. 50,000 and professional tax. 
• LTA (Leave Travel Allowance) which can be claimed twice in a period of four years. 
• HRA (House Rent Allowance) for the individuals staying in rented accommodation. 
• Deductions under section 80TTA (Interest on deposits on savings account) and section 80TTB (Interest on deposits to senior citizens) 
• Interest paid on Housing Loan under section 24 
• All the deductions under section 80C, 80CCC and 80CCD (LIC, ELSS, NPS, etc) 
• Deductions under section 80D (Premium for medical insurance), 80DD & 80DDB (Expenses incurred on disabled relative)  
• Deductions under section 80E (Interest paid on education loan) 
• Deductions under section 80G (Donations made to charitable institutions) 
• However, the employees will have to sit and compute tax before deciding which one to opt for.  

 Given below is the detailed comparison of both the regimes for various income levels, starting from Rs. 6,00,000. These tax liabilities are calculated considering no deductions for an individual.  

Now, let’s consider deductions and compare the tax liability for the old and new regimes respectively.   

Example: 

Let’s consider a salaried individual Mr. Arvind (below 60years of age) with an income of Rs. 7,80,000. Mr. Arvind stays in Kolkata and pays a rent of Rs. 15,000 per month. 

His salary consists of various components as mentioned below: 

• The basic salary of Mr. Sanil is Rs. 36,000 per month.  
• The HRA (House Rent Allowance) is Rs. 18,000 per month. 
• Annually, Rs. 12,000 has also been included in his salary as LTA (Leave Travel Allowance). 
• Special allowance of Rs. 10,000 per month. 
• PF contribution (12% of basic salary per month) is Rs. 4,320, which, when calculated annually will amount to Rs. 51,840. 

1. Computation of HRA Component: 

The lowest value among the three mentioned components below will be exempted from tax: 

• Actual HRA received: Rs. 2,16,000 
• 50% (for metro cities & 40% for non-metro cities) of annual basic salary (Rs. 4,32,000 in this case) – Rs. 2,16,000 
• Rent paid less 10% of basic salary (Rs. 1,80,000 – (10% of Rs. 4,32,000))- Rs. 1,36,800 

Taxable HRA Amount- Rs. 2,16,000 – Rs. 1,36,800 = Rs. 79,200 

**In this case, the least amount among the above mentions entities is Rs. 1,36,800. Hence, it is exempted from the total HRA received i.e. Rs. 2,16,000.  

2. Computation of Income Taxable from Salary: 

3. Computation of Total Deductions: 

Here, the investments of Mr. Arvind come into consideration through which he can claim deductions under various sections:  

• Investments in Public Provident Fund Rs. 36,000 
• Premium towards LIC of Rs. 60,000    
• Investments in EPF (Employer Provident Fund) Rs. 51,840 
• Medical Insurance for self, amounting to Rs. 10,000  

Hence, Mr. Sanil can claim deductions under the following sections: Know more about deductions you can avail of under various sections.   

4. Computation of Gross Taxable Income: 

5. Computation of Income Tax following the Old Regime:  

According to the old regime, Mr. Arvind is liable to a sum of Rs. 9,118.72 as Income Tax, as per his salary and investments.   

6. Computation of Income Tax following the New Regime: 

According to the new regime, Mr. Arvind is liable to pay a sum of Rs. 43,680 as Income Tax, after foregoing all the exemptions. Hence, in this case, Mr. Arvind can opt for the old regime as he has to pay less amount under this regime as compared to the new one.   

However, the tax liability for every individual is differs based on his personal investments and expenditures. 

Significant Tax announcements made by Finance Minister, Nirmala Sitaraman, for 2020: 

• The deposit on the credit guarantee insurance per depositor has been increased from Rs.1 lakh to Rs. 5 Lakhs. 
• The Dividend Distribution Tax has been abolished, which means, the firms now need not pay the tax as it will be taxed on the recipient’s end at the applicable rates. 
• Any contributions made on behalf of the employer towards NPS (National Pension Scheme), PF (Provident Fund), EPFO (Employees’ Provident Fund Organization), etc above Rs. 7 Lakhs will now be taxed.  
• The next and vital update is about the Tax Dispute Settlement Scheme. According to Finance Minister Sitaraman, if you have any disputes with the tax authorities regarding the taxes, you can settle for once. If you choose to do so before the 31st of March, you will not be charged any penalties and will be expected to pay just the dispute amount.  
• This scheme will however be open till June 2020, provided that you are liable to pay a nominal amount as a penalty.  
• Another major update is about the taxation of NRI income. From now on, NRIs who are not paying tax for their income abroad will be liable to pay tax in India, based on the tax slab they fall into.