New personal concessional tax regime - Is it a smart option?

The year 2020 has brought a totally new experience to the humankind and made us realized our true status against nature. All inventions and developments made by mankind are useless against nature and its power. Everyone in the world has suffered, directly or indirectly, due to COVID -19 pandemic. Due to Lockdown and interruption in the economic cycle, the financial budget of every household in the country especially the middle class has affected badly. Under this situation, the majority of taxpayers are struggling to manage their finances and taxes.

In order to provide significant relief to the individual taxpayers and to simplify the Income-tax law, the Finance Act 2020, has recently introduced new concessional personal tax regime, (hereinafter referred as 'New tax regime'), by inserting Section 115BAC in the Income-tax Act,1961 ('the Act') with effect from the Financial year 2012-21 (Assessment year 2021-22)". Under the situation of Covid-19, with the intention to reduce the final tax liability, many taxpayers are trying to figure out what is the New tax regime, which regime should be opted, and which tax regime would be more beneficial to them, etc. In this article, we have tried to provide an understanding about New tax regime in details along with the advantages and disadvantages and it's comparison with the existing tax regime.

A. New tax regime:

Under existing tax structure (herein after referred as 'Regular tax regime'), the Individual and Hindi Undivided Family has 3-tier slab rates of tax of 5%, 20% and 30% and also has option for buckets of deductions, allowances and exemptions. Whereas under new tax regime, the taxpayer has 6 tier concessional slab rates of tax of 5%,10%, 15%, 20%, 25% and 30%. However, majority of deductions, allowances and exemptions, which are allowed under regular tax regime, are not allowable.

Slab rate of tax: The slab rates of tax under regular tax regime and new tax regime are tabulated as under for ease reference:

Surcharge: The above rates of the tax are subject to surcharge under both tax regimes as under:

Education and Higher Education cess : The above rates are further subject to education and higher education cess @ 4% of the total of tax and surcharge.

• Rebate u/s. 87A : Under both the tax regime, new as well as regular, no tax is payable on income upto Rs. 2,50,000/-. Further, Rebate under section 87A of the Income tax Act 1961 upto 12500 is available if the total taxable income is upto Rs. 5,00,000 in a financial year.

• Eligible Assessee: An Individual and HUF (Both resident as well as Non-resident) (herein after referred collectively as 'the taxpayer').

• Optional: The new tax regime is optional for the taxpayer. The taxpayers can evaluate his/her tax liability under both, regular tax regime as well as new tax regime and can choose more beneficial regime for the Financial Year 2020-21 i.e Assessment Year 2021-22 or any subsequent Assessment Year.

• How to exercise: The taxpayer having no business income, can exercise his option of choosing between the two tax regimes, every year, based on his entitlements of 'specified deductions'. However, for the taxpayer having business income, the option once exercised shall be valid and shall be applicable for that Assessment Year in which the option is exercised and for all subsequent Assessment Years. In simple words, the taxpayer, having no income from business or profession, can switch between the new tax regime and regular tax regimes every year, whereas, the taxpayer, having income from business or profession, cannot switch between the new tax regime and regular tax regimes every year. Further, if the taxpayer having income from business or profession opts for the new tax regime, such taxpayers get only one chance in their lifetime to come back to the regular tax regime and will not be eligible for opting new tax regime again, unless the taxpayer's business income ceases to exist.

• No classification of Individuals: There is no classification of Individual like senior citizen or super senior citizen for the purpose of tax rate and therefore, the basic exemption limit of Rs. 2,50,000/- will remain the same for all the taxpayer under new tax regime.

• Conditions for availing new tax regime: The taxpayers willing to opt new tax regime are required to fulfill certain conditions provided under section 115BAC of the Act to opt for the new tax regime. One of the conditions is that various exemption/deduction/ allowance (discussed hereunder) will have to be forgone by the taxpayer.

• Certain deductions under chapter VI-A are allowed: The deductions for i) Deduction for NPS, over & above the benefit u/s 80CCD(1a) (Section 80CCD(1b)) & ii) Deduction for Hiring New Employees above Count of 50 Employees (Section 80JJAA), are allowed under both tax regime.

B. Deduction/exemption/allowance/losses which are not allowed (income-head wise) under new tax regime:

Income From Salary:

• Section 10(5) – Leave Travel Concession,
• Section 10(13A) – House Rent Allowance,
• Section 10(14) – Allowance other than allowances as may be prescribed for this purpose
• Section 10(17) – Allowance to MP's / MLA's
• Section 16 – Standard deduction (Rs. 50,000), deduction of entertainment allowance for government employees (5000) and Professional Tax (Rs. 2500)

Income from House property:

• Section 24(b)- Interest on house property in respect of self-occupied or vacant property (Loss from rented house property shall not be allowed to be set off under any other head and would be allowed to be carried forward)

Income from Business or Profession:

• Section 10AA – Exemption for newly established Special Economic Zones
• Section 32(1)(iia) – Additional Depreciation @ 20% or 35% for manufacturing units
• Section 32AD- Investment in new plant and machinery in notified backward areas in certain states
• Section 33AB – Tea, Coffee & Rubber Plantation Business
• Section 33ABA – Site Restoration Fund
• 35(1)(ii) Deduction in respect of amount paid to university, college or other institution for certain scientific research
• 35(1)(iia) Deduction in respect of amount paid to certain companies to be used for scientific research
• 35(1)(iii) Deduction in respect of amount paid to research association
• 35(2AA) Expenditure on scientific research
• Section 35AD – Specified Business Profits Fully Exempt
• Section 35CCC – Agriculture Extension Projects

Income from Other Sources:

• Section 10(32)- Deduction of income of minor child upto ₹1,500 per child for maximum 2 children
• Section 57 (iia)- Deduction from family pension

Set off and carry forward of losses:

• No set off of any loss carried forward or depreciation from any earlier assessment year is allowed, if such loss or depreciation is attributable to any of the deductions referred above;
• No set off of any loss under the head “Income from house property” with any other head of income is allowed;
• Depreciation under section 32 of the Act (except additional depreciation as referred in clause (iia) of sub-section (1) of the section 32 of the Act), is required to be claimed in such manner as may be prescribed.

Deduction under Chapter VI-A:

• Section 80C – Deduction in respect of life insurance premium, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc
• Section 80CCA - Deduction in respect of deposits under National Savings Scheme or payment to a deferred annuity plan.
• Section 80CCB - Deduction in respect of investment under ELSS
• Section 80CCC - Deduction in respect of contribution to Pension Funds
• Section 80CCD –Deduction in respect of contribution to pension scheme of Central Government.
• Section 80D –Deduction in respect of health insurance premia
• Section 80DD – Deduction related to Medical Treatment of Disabled Person,
• Section 80DDB – Deduction related to medical expenses of specified diseases,
• Section 80E – Deduction related to Interest on Higher Education Loan,
• Section 80EEA – Deduction related to Housing Loan Interest
• Section 80EEB - Deduction of up to Rs 1.5 lakh for on Auto Loan interest on the electric vehicle
• Section 80G – Donation to specified Institutions,
• Section 80GG – Rent Paid for the Residence,
• Section 80GGA – Donation towards scientific Research and Rural Development
• Section 80GGC – Donation made to Political Parties
• Section 80QQB - Deduction under Royalty Income of Books
• Section 80RRB – Deduction under Royalty Income of Patents
• Section 80TTA – Interest on Savings Bank Account
• Section 80TTB - Interest on Savings by Senior Citizen under Bank Deposits, Post Deposits, Co-Operative Bank Deposits

C. Advantages and disadvantages of new tax regime:

Advantages:

• Lower rate of tax: Under new tax regime, tax rates are lower compared to regular tax regime.

• Less complexity in compliance: Under new tax regime, many tax deduction/allowances/exemptions are not allowed and therefore, the requirement of maintaining the documents and filling the return of income would be lesser and simple.

• More liquidity of funds and flexibility in making investments: As discussed above, various investments based deduction are not allowed under new tax regime, the tax payer will have more liquidity of funds at his/her disposal. The taxpayer has flexibility to invest this fund at his/her choice instead of making investments only in specified instruments for taking deduction under regular tax regime.

Disadvantages:

• Restriction on deduction/allowances and exemptions: Under new tax regime, various deductions, allowances and exemptions which are available under regular tax regime, are not allowed and to that extent, the taxpayer taxable income will be more under new tax regime as compared to regular tax regime.

D. Which one to opt- New tax regime or Regular tax regime?

• There cannot be a straight answer to this question. It depends on each taxpayer's financial needs and situation. Apparently, the new tax regime may looks attractive as it has reduced rates of tax but due to non-allowability of various deduction /exemptions, it becomes imperative to do comparison of both the tax regimes before opting for either of one.

• In doing so, the taxpayer should consider all the exemptions/deductions and allowances that are claimed/availed in the past years. For example:

• If the taxpayer is paying premium on term plan, the deduction for it is available under regular tax regime and not in new tax regime.
• If the taxpayer is staying on rented house or has taken a home loan, the benefit for rent paid or for repayment of home loan, interest as well as principle, is allowable under regular tax regime but not allowed under new tax regime.
• For the salaried taxpayer, standard deduction of Rs 50,000 is allowed under regular tax regime but not allowed new tax regime. Further, various benefit received by salaried taxpayer like Leave Travel Allowance, Food Bill, Phone Bills, etc will be taxable in new tax regime.
• The taxpayer having business income should evaluate the implication of provision of new tax regime very carefully since such taxpayer does not have option to shift between regular tax regime and new tax regime alike other taxpayer who does not have business income.

E. Tax implication under New tax regime vs. Regular tax regime -Examples:

Example-1:

Mr. Niranjan Patel is a software engineer, works for well-known software Development Company in Mumbai, India. He receives a monthly salary of Rs. 75,000 in the Financial Year 2020-21. Following is his monthly salary components.

• Basic Salary Rs. 40,000
• House Rent Allowance Rs. 20,000
• Special allowances Rs. 15,000

Following are other financial details of Mr. Niranjan Patel for financial year 2020-21:

• The company has paid professional tax of Rs. 2,500 on behalf of Mr. Niranjan Patel.
• Mr. Patel has rented a house in Mumbai and pays Rs. 25000 rent per month.
• He also pays life insurance premium for himself and his wife total amounting to Rs. 35,000 p.a Medical insurance for himself of Rs. 12,500 p.a. and for his parents of Rs. 25,000.
• He has earned Interest of Rs, 12,000 in his saving bank account.
• He invests Rs. 10,000 every month in the Mutual

It is to be observed that Mr. Patel is liable for Rs. 64,662 tax under new tax regime, as compared to Nil tax liability under regular tax regime, despite of the lower rates of slabs in the new tax regime. This is mainly due to not allowability of various deduction/allowance or exemptions under new tax regime.

Example 2: Mr. N Shah, from Mumbai, has got his degree and joined a reputed software development company for monthly salary of Rs. 75,000 p.m for the Financial Year 2020-21 as under:

Basic Salary Rs. 40,000

House rent allowance Rs. 20,000

Special Allowances Rs 15,000

Mr. N.Shah is staying with his parent and he doesn't have to pay life insurance premium or medical premium as it is being paid his father and his father HUF respectively. Further, Mr.N Shah invest his saving in a startup by his friends. Interest income on saving account is of Rs. 7,500 for the year.

In case of Mr. N Shah, the new tax regime is more beneficial compared to regular tax regime.

As can be seen from above two examples, it becomes imperative to do detail analysis of tax impact and choose the best option applicable as per the facts of his case and exercise the same.

F. How to opt for the new tax regime:

• The taxpayer has to file a form (which is yet to be prescribed) alongwith the return of income on or before the due date of filing return of income under section 139(1) of the Act for Assessment Year 2021-22 and every subsequent years to opt for the new tax regime.

• However, in case of the taxpayer, who is having income from business or profession, the form filed opting new scheme on or before the date of furnishing return of income under section 139 of the Act for Assessment Year 2021-22 or any subsequent Assessment Year, shall be remain valid for all subsequent Assessment Years. In other words, such taxpayer has no option to opt the scheme every year. Further, as mentioned earlier, such taxpayer opted for the new taxation regime, got only one chance in their lifetime to come back to the regular tax regime and will not be eligible for opting new tax regime again, unless the taxpayer business income ceases to exist.

G. TDS on salary after introduction of new tax regime:

• Concerns had been raised about the deduction of tax at source from the salary income due to availability of 2 different tax regimes. Therefore, representations have been made by the various stakeholders to the Central Board of Direct taxes seeking clarification in this regard. (CBDT circular no. C1 of 2020, )
• An employee, having income other than income under the head 'Income from Business and Profession', and intending to opt for new tax regime may intimate the employer of his intention for each financial year and once the intimation is made cannot be changed during that financial year.
• Upon such intimation, the employer will compute the total tax liability base on provision of the new tax regime and deduct tax accordingly. If the employee does not provide or failed to provide such intimation to the employer, the employer will compute total tax liability as per provision of regular tax regime.
• It is also clarified that the intimation provide by the employee is applicable only for TDS purpose and the taxpayer is required to opt the scheme at the time of filing return of income only. Therefore, if the taxpayer has intimated for new tax regime, he/she can opt regular tax regime at the time of filing return of income.

Conclusion:

The new concessional tax regime is beneficial to the taxpayer who is willing to forgo various deduction/exemption and allowances, and want to have more liquid fund in hand. The regular tax regime though have high tax rates compare to new tax regime, is still beneficial due to availability various options of deduction/exemptions and allowances. It is worth to note that in the budget speech, the Hon'ble Finance Minister has expressed the intention of removing all such deduction/exemption or allowance from the income tax act in long run to make tax system easy and simple. At present, the tax payer has an option to choose a better tax regime and such option should be exercised after due analysis and taking appropriate advice from the expert.

This article is co-authored by :

CA Hetal Thakkar - she can be reached at cah etalthakkar212@gmail.com for any assistance / information on the subject.
CA Ashok Unadkat – he can be reached at ca.ashokunadkat@gmail.com for any assistance/ information on the subject.

Disclaimer: The information contained herein is intended to provide general information and is not an exhaustive treatment of this particular subject. The views as discussed above are purely personal and may or may not find acceptance of others and therefore, the authors cannot be held responsible for any personal or professional liability arising out of the same. Authors of this article are not, by means of this material, rendering any professional advice or recommendation or services and the information is not intended to be a substitute for specific professional advice. The information provided in this article is liable\ to change either through amendment to the law/regulations or through different interpretation by the authorities or for any other reason whatsoever.