The Finance Minister, Nirmala Sitharaman, presented the Union Budget 2020 in the parliament yesterday. In this post, let’s look at the highlights of the Budget proposal. We will look at the proposals from personal taxation perspective only.
#1 Restructuring of Income Tax Slabs, Lowering of Personal Tax Rates and a Choice
There is a major alteration in the income tax slabs and a reduction in the Income Tax rates too. However, this benefit comes with a caveat. Let’s first look at the old and the new slabs. The old slabs are also linked to the age of the taxpayer. To simplify the chart, I will consider the old tax slabs only for those less than 60 years of age.
| Old Tax Slab | New Tax Slab | ||
| Taxable Income | Tax rate | Taxable Income | Tax rate |
| Up to Rs 2.5 lacs | NIL | Up to Rs 2.5 lacs | NIL |
| Rs 2.5 lacs – Rs 5 lacs | 5% | Rs 2.5 lacs – Rs 5 lacs | 5% |
| Rs 5 lacs – Rs 10 lacs | 20% | Rs 5 lacs – Rs 7.5 lacs | 10% |
| Rs 7.5 lacs – Rs 10 lacs | 15% | ||
| Above Rs 10 lacs | 30% | Rs 10 lacs- Rs 12.5 lacs | 20% |
| Rs 12.5 lacs – Rs 15 lacs | 25% | ||
| Above Rs 15 lacs | 30% | ||
| You get a choice to stick with the old slabs or opt for the new slabs. However, if you opt for the new slabs, you will have to let go of various deductions. For the old slabs, age < 60 is considered. | |||
Applicable for both the Tax slab structures | |||
| *Rebate of Rs 12,500 for taxable income upto Rs 5lacs | |||
| Surcharge of 10% on income tax if the taxable income is between Rs 50 lacs and Rs 1 crore | |||
| Surcharge of 15% on income tax if the taxable income is between Rs 1 crore and Rs 2 crores | |||
| Surcharge of 25% on income tax if the taxable income is between Rs 2 crores and Rs 5 crores | |||
| Surcharge of 37% on income tax if the taxable income is above Rs 5 crores | |||
| Cess at 4% applicable over income tax and surcharge | |||
As I see, the new tax slab regime is agnostic of the age of the taxpayer.
What Is the Catch?
For you to take benefit of the lower income tax rates, you should not have taken any deduction under 80C to 80U of the Income Tax Act. You should have no business income in the financial year. A new clause 115 BAC (1) has been added for the purpose. You won’t be able to get benefit for Interest payment under Section 24 too if you want to opt for newer tax slabs.
You Have a Choice
As a taxpayer, you have two options.
- Stick with the old tax slabs and take all the exemptions and deductions OR
- Go with the new tax slabs and let all the tax exemptions go
What Should You Choose?
There is no fixed answer. It depends on the tax deductions you are currently availing. Though the list of exemptions that you will have to let go if you want to opt for the new regime is quite long, let’s look at the common deductions that many taxpayers avail.
- Standard deduction of Rs 50,000 (only for the salaried)
- 1.5 lacs under Section 80C (Life Insurance, PPF, EPF, ELSS, 5-year FDs etc)
- Up to Rs 2 lacs for home loan interest payment under Section 24
- Rs 25,000 for health insurance premium payment (can be more if you are a senior citizen or are paying premium for your parents)
- Rs 50,000 under Section 80CCD(1B) for investment in NPS
- Interest on education loan under Section 80E
- Benefit of Leave Travel Allowance (LTA) under Section 10(5)
- Benefit of House Rent Allowance (HRA) under Section 10(13)
You wouldn’t be able to get exemptions for above deductions / allowance if you opt for the new regime. And that’s a very long list. However, deduction for employer contribution under Section 80CCD(2) will still be available under the new regime.
Illustrations
#1 Taxable income of Rs 7.5 lacs and deductions of Rs 1.5 lacs
- Under the old slabs, the tax liability (before surcharge and cess) will be Rs 32,500.
- Under the new slabs, the tax liability will be Rs 37,500.
#2 Taxable income of Rs 10 lacs and deductions of Rs 1.5 lacs
- Under the old slabs, the tax liability (before surcharge and cess) will be Rs 82,500.
- Under the new slabs, the tax liability will be Rs 75,000.
#3 Taxable income of Rs 10 lacs and deductions of Rs 2.5 lacs
- Under the old slabs, the tax liability (before surcharge and cess) will be Rs 62,500.
- Under the new slabs, the tax liability will be Rs 75,000.
#4 Taxable income of Rs 15 lacs and deductions of Rs 3 lacs
- Under the old slabs, the tax liability (before surcharge and cess) will be Rs 1.72 lacs.
- Under the new slabs, the tax liability will be Rs 1.87 lacs.
#5 Taxable income of Rs 20 lacs and deductions of Rs 3 lacs
- Under the old slabs, the tax liability (before surcharge and cess) will be Rs 3.22 lacs.
- Under the new slabs, the tax liability will be Rs 3.37 lacs.
It remains to be seen whether these tax-relief are beneficial for you or not. A lot will depend on what tax benefits you are currently taking. However, I do not agree with one of the assertions made by the Finance Minister. The FM thought that this will make tax-filing simpler and most taxpayers won’t need the assistance of tax professionals. I don’t agree. There is one more element of decision making now. Whether you should stay in the current tax regime or pay taxes under the new regime. Tax professionals (Chartered Accountants) should be super-happy.
At the same time, I hope the level of mis-selling will go down. Many poor financial products are peddled to investors under the garb of tax-saving. And many investors fall for such products for precisely the same reason. Now that they have this option of new tax slabs, they may feel fine saying ‘No’ to such products.
#2 Dividend Now Taxable in the Hands of the Investor
Till now, dividends given by the companies or the mutual funds were EITHER not taxable upto Rs 10 lakhs in the hands of the investor OR taxed at 10% beyond Rs 10 lakhs. However, the companies or the mutual fund houses deducted DDT (in the form of dividend distribution tax) before paying the dividend to the investors. The effective tax hit was ~20.6% for the dividend distributed by the companies while it was ~11.5% and ~28% in case of equity and debt mutual funds respectively. Now, DDT has been done away with. The dividend shall now be taxable in the hands of the investor at their marginal tax rates. Clearly, this benefits those in the lower tax brackets. Those in the 30% tax bracket won’t like this decision.
#3 Extension on Home Loan Tax Benefit under Section 80EEA
In Union Budget 2019 (July 2019), the Government had introduced Section 80EEA to provide additional deduction of Rs 1.5 lacs for interest paid on housing loans. This was over and above the relief on interest of Rs 2 lacs under Section 24 of the Income Tax Act. The relief under Section 80EEA was subject to the following conditions.
- The home loan is sanctioned between April 1, 2019 and March 31, 2020.
- You must not own any residential house on the date of sanction of loan.
- The Stamp Duty Value of the house does not exceed Rs 45 lacs.
Remember the tax benefit would continue to be available in the following years as long as the above 3 conditions are met. In the budget (2020), the relief has been extended by 1 year to the home loans sanctioned between April 1, 2019 and March 31, 2021.
Remember, you will be able to take the tax benefit if you stick with the old tax slabs. If you opt for the new tax slab, you won’t be able to avail this tax benefit.
#4 Tax-Free Employer Contribution to EPF, NPS or Superannuation Fund Now Capped
Employer contribution to NPS, provident fund or superannuation fund in excess of Rs 7.5 lacs per annum will now be taxable. Earlier, there was no cap on this tax exemption. Many high salaried taxpayers who were utilizing this route to save taxes won’t like this.
#5 Other Important Announcements
LIC will go for an IPO. So, if you are not content with holding LIC policies, you will soon be able to hold its stock too. Deposit insurance has been increased from Rs 1 lac to Rs 5 lacs. Your savings deposits and deposits will now be insured up to Rs 5 lacs.