TAX AMENDMENTS FOR INDIAN RESIDENTS
1. New Tax Regime v/s Old Tax Regime
An optional income tax regime for Individuals and Hindu Undivided Family (HUF) taxpayers is proposed with the below tax slabs:
Option A – Pay tax at the above rates and no deductions or exemptions to be claimed.
Option B – Continue to Pay taxes at earlier rates after claiming deductions and exemptions as earlier.
- Option by Individuals and HUF having Business Income needs to exercise option once and follow the same option for all subsequent assessment years. The option can be withdrawn only once after exercising the option.
- Individuals and HUF not having any Business Income given the flexibility to exercise options every year. Every year the taxpayer has to calculate tax under both New Tax Regime as well as the Old Tax Regime by weighing the pros and cons. Remember, the old tax regime still continues. The new tax regime gives you the option to decide which regime you want to pick. If you are a Salaried Individual, you have the option to choose every year.For the FY 2020-21 (AY 2021-22), the taxpayer choosing the optional income tax regime should forego the following:
- Leave Travel Allowance (LTA)
- House Rent Allowance (HRA)
- Conveyance allowance
- Daily expenses in the course of employment
- Relocation allowance
- Helper allowance
- Children education allowance
- Other special allowances [Section 10(14)]
- Standard deduction
- Professional tax
- Interest on housing loan for a self-occupied house (Section 24(b))
- All tax-saving investment deductions under Chapter VI-A (80C,80D, 80E and so on)
(Except, deduction under Section 80CCD (2)—employers’ contribution to NPS, and Section 80JJA)
Let’s explain with some examples:
CASE 1: If the taxpayer has cash flow commitments towards house rent, housing loan, and yearly tax savings, the tax impact would be as follows:
For a Salaried Income of Rs.10 Lakh
In the example mentioned above, the taxpayer pays Rs 28,101 as income tax based on the old tax regime. However, the taxpayer has to pay an income tax of Rs 78,000 after foregoing the exemptions and deductions under the new regime. Thus, the taxpayer pays a higher income tax of Rs 49,899 and does not get a deduction for the cash outflows towards house rent, tax savings, medical insurance, the standard deduction, and professional tax when the new tax regime is chosen.
Thus, the taxpayer gains Rs 49,899 in income tax payable under the Old Tax Regime.
CASE 2: If the taxpayer does not have any cash flow commitments towards house rent, housing loan, and yearly tax savings, the tax impact would be as follows:
In the above case, the taxpayer saves Rs 43,420 in income tax payable under the New Tax Regime.
Case 3: Consider a taxpayer who has no investment and earns Rs 25 lakh or above.
In this case, the taxpayer saves Rs. 61,620 in income tax payable under the New Tax Regime.
The income tax break that individuals can still claim in the new personal income tax regime
- Contribution to the National Pension System (NPS) made by the employer under section 80CCD (2).
- Gratuity received from your employer
For Non-Government employees, the maximum tax-exempt gratuity will be Rs 20 lakh in his/her lifetime. For Government employees, all gratuity received is tax-exempt, irrespective of the amount received by them. Gratuity received due to the death of an employee will remain tax-exempt in the new tax structure as well without any maximum limit.
- Amount received on maturity of life insurance
Maturity proceeds received from a life insurance company continue to be exempted from tax under section 10(10D) in the new tax regime.
- Employer’s contribution to your EPF/NPS account
Contributions made by the employer to the employee’s EPF, NPS and/or superannuation account will be exempted from tax provided the annual contribution to all the accounts (with reference to the employee) does not exceed Rs 7.5 lakh in a financial year. Any interest or gains earned from the excess contribution will also be taxable in the hands of an employee.
- Interest received up to 9.5 percent per annum from EPF
The interest received from the EPF account continues to be exempted from tax in the new tax regime as well, provided it does not exceed 9.5 percent.
- Interest and maturity amount received from PPF
Under the new tax regime, an individual cannot avail tax benefit under section 80C on the contribution made to his/her PPF account. However, any interest accrued, or maturity amount received will be exempted from tax in the new tax regime.
- Gift from employer
Gift received from the employer for up to Rs 5,000 remains exempted from tax under both – new and existing regimes.
- Interest and payment received from Sukanya Samriddhi Yojana
Individuals investing in Sukanya Samriddhi Yojana for their girl child will continue to receive tax-exempted interest in the account under the new tax regime. Further, the payment proceeds received from the scheme’s account will remain exempted from tax. However, investment under this scheme will not be available for tax-break under section 80C under the new tax regime
- Commutation of pension
For non-government employees, one-third of the commuted pension received is exempted from tax under the current income tax laws, if gratuity is received. However, if an employee has not received gratuity, then half of the commuted pension received will be exempted from tax. Even if the taxpayer opts for the new regime, the taxation of the commuted pension remains the same.
- Leave encashment on retirement
Leave encashment received by non-government employees is exempt from tax up to Rs 3 Lakh. If the employee has opted for the new tax regime, then leave encashment received at the time of retirement will continue to remain tax-exempt in the new tax regime.
- Voluntary Retirement Scheme (VRS)
The monetary benefit received by an employee due to opting for a voluntary retirement scheme from his employer will remain exempt from tax for maximum up to Rs 5 lakh in both – new and existing tax regimes.
DISCLAIMER: These changes are as per the Union Budget,2020 which are applicable post-April,2020. There might be changes as per the Circulars issued by the Income Tax Department in the future.