Hurray! Good news for the Individual Income taxpayers. The Finance Minister Nirmala Sitharaman has come with a reduced income tax slab rate for the Individual Tax Payers on 1st February 2020. This tax slab rate is applicable for the Financial Year 2020-21.
The Finance Minister in its Budget 2020 has proposed the new income tax slab to reduce your tax liability. But to avail of this benefit, you have to forgo the deductions. Let us see what are the new income tax rates and what are the conditions.
The New Income Tax Slab Rate of 2020
Similar to the last year budget, if the income of an individual is up to ₹5 lakh only it will be completely tax free. Thus he will get tax rebate as usual u/s 87A. Only those tax payers need to pay income tax who have income more than ₹5 lakh.
Thus according to the Budget 2020, now the new Income Tax Slab Rate is-
Income Slab (in Rs.) Old Tax Rate New Tax Rate
0 – 2.5 Lakhs Nil Nil (As Before)
2.5 – 5 lakh 5% 5% ( As Before)
5 – 7.5 lakh 20% 10%
7.5 – 10 lakh 20% 15%
10 – 12.5 lakh 30% 20%
12.5 – 15 lakh 30% 25%
Above 15 lakh 30% 30% (As Before)
- Thus your ₹2.5 lakh income is tax free. And between ₹2.5 lakh to 5 lakh you have to pay tax at 5% as before.
- Now a new income slab from ₹5 lakh to 7.5 lakh. If you fall under this slab, you have to pay 10% tax instead of 20%.
- In the same way, you have to pay 15% tax on income between ₹7.5 lakh to 10 lakh. Earlier there was a 20% tax rate for this slab.
- Accordingly, there is another slab for ₹10 lakh to 12.5 lakh. And the income tax rate for this slab is 20%. This rate replaces the old rate of 30%.
- Again, you have to pay tax 25% for the slab ₹12.5 lakh to 15 lakh. According to the old regime, there was also a 30% tax rate for this slab.
- However, there is also a 30% tax rate available as before. But now you have to pay 30% tax on income above ₹15 lakh. Earlier this rate was applicable on income above ₹10 lakh.
- Thus you can see the income slab, as well as income tax slab both, are reduced.
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New Tax Rate is Optional
This is the new provision. As it was never before. The Government has proposed that the individuals have the option to choose one tax regime. In other words, now you may choose a tax regime between old and new for the calculation of your income tax.
But there is one condition as well. If you choose the new tax regime, you have to forgo the deductions and exemptions benefit. It means you can not avail the deductions and exemptions benefit if you choose the new tax rates.
But you can still avail those benefits under the old tax rates. Thus under the new regime, you have to calculate tax without deductions. However, you are free to invest same as before.
The Government has decided to continue both regimes for now because most of the individuals would have invested because of old tax rates.
Thus we can say that the new regime is more beneficial for the first time tax payers. And also for those who are not investing in any instrument as of now but paying tax at a high rate.
The Government is Ending the Tax Deduction Benefit
As I told you, for the new tax regime the government is ending the tax deduction benefits. The most popular tax deduction benefit under section 80C is also in this list. Moreover, some exemptions are also going to end.
For Example, you get ₹1.5 lakh deduction on investment under section 80C. In addition, there is also ₹50,000 deduction available under the Additional Voluntary Investment in NPS. In the same way, you get different types of exemptions on your income u/s 10. Thus under the new tax regime, these deductions and much more reliefs are going to end.
The Government has proposed to end 70 types of deductions and exemptions. And also intent to remove the other 30 deductions. Look at the few main deductions and exemptions which are going to end-
Deductions will Not Available
- Insurance Premium
- Tuition fees
- Health Insurance
- Saving Account Interest
- Home Loan
- Education Loan
Exemptions will Not Available
- Standard Deduction of ₹50,000
- Travel Allowance
- Daily Allowance
- Conveyance Allowance
- Uniform Allowance
New Tax Slab is Not Applicable to Business Income
The Government is not providing the benefit of the reduction in income tax rates to self employed. It means the business owners and professionals are not eligible to gain the benefits of reduced tax rates.
It is very clear in the Budget that if you have also business income in your total income, then you can not avail the benefit of the new regime. However, if you have Capital Gains and House Rent Income then you can take the benefit of new rates.
New Tax Rates will Continue Further
Once you choose the benefit of the new regime you can continue it for further years. Thus you can continue to calculate your tax under the new tax rates. But if you do not follow the rules in any year then you would have to calculate tax under the old rates.
Moreover, once you choose the new regime you can not adjust the Capital Loss of earlier years. Accordingly, you may not avail the benefit of depreciation as well.
Applicable to the Financial Year 2020-21
This Budget is for the financial year 2020-21. Also, the new income tax rates are applicable for this year. Thus you would have to pay tax next year under the new regime. And this tax will be on the income you have earned from 1st April 2020 to 31st March 2021. The return will be filed next year before 31 July under the new rates.
So, do not confuse for the financial year. When you will go to file return this year in July, it will be for the income from 1st April 2019 to 31st March 2020. And tax will be on old rates not on the announced new tax rates.
Important Points to Note
- Definitely, the new tax rates will give you much relief. Not only it will reduce your tax liability but it will remove your unnecessary compulsion of investment.
- Most of the person do invest to save tax. Now they would not be bounded to take unnecessary insurance policies. Moreover, they may choose the Savings Instruments freely.