Budget gives option of lower income tax rates, new tax slabs minus 70 exemptions

Budget gives option of lower income tax rates, new tax slabs minus 70 exemptions

Highlights

• Tax payers have the option to choose between the existing income tax regime and a new regime
• New regime has slashed income tax rates and new income tax slabs but no tax exemptions
• Which tax regime would be beneficial, i.e., result in lower tax payable for each individual is likely to depend on his/her income composition and investments done

Budget 2020 has proposed a new tax regime slashing income tax rates and rejigging income tax slabs to reduce total tax payable by individuals. As per the new regime, 70 tax exemptions will be removed but the income between Rs 5 lakh and Rs 7.5 lakh will be taxed at 10% down from current 20%, income between Rs 7.5 lakh and Rs 10 lakh will be taxed at 15% down from current 20%, and income between Rs 10 lakh and Rs 12.5 lakh will be taxed at 20% down from current 30%. Income between Rs 12.5 lakh and Rs 15 lakh will be taxed at 25% down from current 30%. Incomes above Rs 15 lakh will continue to be taxed at 30%.

Budget 2020 has offered tax payers the option to choose between the existing income tax regime and a new regime with slashed income tax rates and new income tax slabs but no tax exemptions. The new tax regime offers lower tax rates and new tax slabs and simultaneously removes tax exemptions and will result in lower tax outgo for the tax payer, according to the finance minister.

Which tax regime -old or new--would be beneficial i.e. result in lower tax payable for each individual is likely to depend on his/her income composition and investments done. Each individual will have to do his/her own calculations to figure out which tax regime is more beneficial to him/her. For example, a person who has bought a long term life insurance policy may have to continue paying the premium and claiming the tax benefit on it.

As dividends become taxable in your hands, your taxable income will increase. This will add to the uncertainty about how much tax relief an individual will get from all the budget proposals together.


Once these proposals are passed by the Parliament, these changes will become effective from the financial year 2020-21.
Tax slabs under new, optional regime

Income tax slabs	Simplified, optional tax rate
Up to Rs 5 lakh	No tax
Rs 5-7.5 lakh	10%
Rs 7.5-10 lakh	15%
Rs 10-12.5 lakh	20%
Rs 12.5-15 lakh	25%
Above Rs 15 lakh	30%

Currently, income up to Rs 2.5 lakh for resident individuals (age below 60 years) is exempt from tax. Similarly, for senior citizens aged 60 years and above but below 80 years, income up to Rs 3 lakh is exempt from tax. Income up to Rs 5 lakh is exempt from tax for super senior citizens (age 80 years and above).

It must be noted that the then finance minister, Piyush Goyal, during the interim Budget in February 2019, announced a tax rebate of up to Rs 12,500 if net taxable income does not cross Rs 5 lakh. Thereby, making zero tax payable by an individual if his/her taxable income does not exceed Rs 5 lakh.

The noise for a reduction in personal income tax rates/increase in tax exemption limits grew louder after the government slashed corporate tax rates in September 2019. It is expected that this can give a fillip to consumption in the economy.

The new Direct Tax Code report submitted to the Finance Ministry in August last year, too, recommended sweeping reforms for personal taxation. The report is yet to be released to the public for discussion.

Income tax slabs and rates for individuals below 60 years of age

Taxable income slabs	Income tax rates and cess
Up to Rs 2.5 lakh	Nil
Rs 2,50,001 to Rs 5,00,000	5% of (Total income minus Rs 2.5 lakh) + 4% cess
Rs 5,00,001 to Rs 10,00,000	12,500 + 20% of (Total income minus Rs 5 lakh) + 4% cess
Rs 10,00,001 and Above	1,12,500 + 30% of (Total income minus Rs 10,00,000) + 4% cess

Income tax slabs and rates for senior citizens (Age between 60 years and 80 years)

Taxable income slabs	Income tax rates and cess
Up to Rs 3 lakh	Nil
Rs 3,00,001 to Rs 5,00,000	5% of (Total income minus Rs 3 lakh) + 4% cess
Rs 5,00,001 to Rs 10,00,000	10,000 + 20% of (Total income minus Rs 5 lakh) + 4% cess
Rs 10,00,001 and Above	1,10,000 + 30% of (Total income minus Rs 10,00,000) + 4% cess

Income tax slabs and rates for super senior citizens (Age 80 years and above)

Taxable income slabs	Income tax rates and cess
Up to Rs 5,00,000	Nil
Rs 5,00,001 to Rs 10,00,000	20% of (Total income minus Rs 5 lakh) + 4% cess
Rs 10,00,001 and Above	1,00,000 + 30% of (Total income minus Rs 10,00,000) + 4% cess

Income tax rates for individuals below 60 years are as follows: No tax on income up to Rs 2.5 lakh, 5 per cent tax on income between Rs 250,001 to Rs 5 lakh; 20 per cent tax on income between Rs 500,001 and Rs 10 lakh; and 30 per cent tax on income above Rs 10 lakh.

For senior citizens (aged 60 years or above but less than 80 years), income up to Rs 3 lakh is exempt from tax. Income from Rs 300,001 to Rs 5 lakh is taxed at 5 per cent, from Rs 500,001 to Rs 10 lakh at 20 per cent and above Rs 10 lakh at 30 per cent.

For super senior citizens, aged 80 years and above, income up to Rs 5 lakh is exempt from tax. Income from Rs 500,001 to Rs 10 lakh is taxed at 20 per cent and above Rs 10 lakh is taxed at 30 per cent.

However, if an individual's net taxable income does not exceed Rs 5 lakh (i.e., income after claiming deductions and tax exemptions), then the net tax liability will be zero. This is because an individual can avail tax rebate of up to Rs 12,500 under section 87A.

Health and education cess at the rate of 4 percent is levied on the income tax plus surcharge wherever applicable. Surcharge on income tax will also be added as per the income slab applicable to the individual.

Surcharge will be added to the total income tax payable by the individual as follows: 10% for income between Rs 50 lakh and Rs 1 crore, 15% for income between Rs 1 crore and Rs 2 crore, 25% for income between Rs 2 crore and Rs 5 crore and 37% for income exceeding Rs 5 crore.

However, on short-term capital gains as per section 111A and long-term capital gains as per section 112A, a surcharge of 15% will be applicable instead of 25% or 37% as mentioned above.