23 February 2022
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 Rs. 500,000 taxable income, as Rebate under section 87A, is available
Note: Surcharge rates for incomes above ₹ 50 lakh 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:
This adds up to a large amount. In fact, according to Economic Times, individual taxpayers claimed a deduction for more than ₹ 4.45 lakh crore 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.
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, it is not as complex as all that. Anyone claiming tax exemptions of ₹ 2.5 lakh or more (for income above ₹ 15 lakh), and ₹ 2.2 lakh 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:
There are, of course, several additional considerations:
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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