Finance

4 March 2023

As we end this Financial year on a rather unusual note, with health and financial crises all around, we’d still want to be prudent about our taxes. Before Finance Minister Nirmala Sitharaman announced the new income tax slab under the Union Budget 2020-21, there was already significant anticipation around it. While the tax rates have, on the surface, been reduced and the tax structure simplified, this is not the entire story. Under the old taxation system, taxpayers were eligible to claim a slew of exemptions and deductions, several of which they would have to forego under the new regime. 

source: Economic Times

Tax payable and savings under new regime if no deductions are claimed

**No tax up to ₹ 5 lacs taxable income, as a Rebate under section 87A, is available

Note: Surcharge rates for incomes above ₹ 50 lacs are unchanged.

Around 70 tax exemptions and deductions would not be applicable under the new system, including all under Chapter VI-A, which would then include:

• House rent allowance (HRA), 
• Investments under 80C, 
• NPS contribution, 
• medical insurance premium
• and more. 

This adds up to a large amount. In fact, according to Economic Times, individual taxpayers claimed a deduction for more than ₹ 4.45 lac crores in their returns for 2017-18. However, about 50 tax exemptions are still around, including standard deduction on rent, agricultural income, income from life insurance, etc. 

• Of course, a major upside to the new income tax slab is the simplification of tax compliance, though avid planners who maximised their deductions would end up paying more in this case. 
• Another upside is the open choice offered to taxpayers, between the two taxation systems. 
• Further, individual taxpayers can switch between the two systems every year, depending on which gives them more benefits.

One major issue with the new income tax slab is that rather than reducing confusion, the additional slabs under the new regime and the fact that people can choose between the old and the new have only served to fan the flames. Now, in addition to trying to figure out how much to pay, taxpayers now also have to calculate which system is beneficial for them. Fortunately, several websites have come out with calculators to help out, including the Income Tax Department itself. 

According to Economic Times, anyone claiming tax exemptions of ₹ 2.5 lacs or more (for income above ₹ 15 lacs) and ₹ 2.2 lacs or more (for lower-income brackets), would end up paying more under the new regime. 

Of course, it’s a bit more complex than that, as it would depend on several factors including the particular deductions being claimed and the actual income tax slabs, as shown in the tables below:

Tax saving/additional payable if only standard deduction and those under sections 80C and 80D

source: EY India

Tax saving/additional payable if tax breaks under HRA in addition to the standard deduction, 80C and 80D

source: EY India

As seen from the first table: 

• Among those claiming only the most common exemptions and deductions, only the high-income earners would benefit from the new regime. 
• The rest, if they claim the entire benefits of ₹ 50,000, ₹ 1.5 lacs and ₹ 25,000 under the respective headings of the standard deduction, 80C and 80D, would lose a considerable amount. 
• However, if they claim HRA (varied as per income level), everyone, from the low brackets to the highest ones, stands to lose in monetary terms.

There are, of course, several additional considerations: 

• First among those is the fact that compliance under the new income tax slab would become a lot less of a headache. Hence, higher-income earners might prefer the new system, considering the extra amount paid is worth the effort saved.
• Additionally, the calculations above have been made considering maximum investment and tax exemption claims under the old system (for example, the entire ₹ 1.5 lacs being claimed under section 80C). If deductions are less than the maximum, the calculations would vary considerably, and depending on the amount, the new regime may be beneficial.
• Further, families can adjust their claims and the income tax slab they choose to avail maximum benefit. This is due to the fact that a single person in a family can only claim several deductions and exemptions. Hence, if one person claims deductions, they may be able to save more in the old regime, while other family members could attain the maximum benefits by shifting to the new regime, thus optimising the benefits for the family as a whole. 

Thus, it is entirely dependent on taxpayers. Their earnings, the amount of tax exemptions they claim under the old regime and the amount of effort they wish to take in compliance all need to be kept in mind while choosing the income tax slab to adhere to. Besides, for individual taxpayers, there is a lot of leeway in terms of choice. They can choose one regime and if they find that it is not working for them, they can always go to the other. Regardless, you may want to check out our tax planning tips to maximise savings.

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