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The Union Budget 2020 has come up with a new tax regime with the intention to lower the tax rates and simplify the procedure of return filing. From the Assessment Year 2021-22 (Financial Year 2020-21) and thereafter, the taxpayers will have the option to discharge their income tax liability either as per Old Tax Regime or as per New Tax Regime. As per this amendment, an individual taxpayer has been given the option to discharge his/her tax liability by opting for any one of these two schemes.

But, is this so simple? The fact is, a common taxpayer has so many doubts in his mind related to this new provision for tax payment. Here, in the following write up, I have tried to cover these doubts and explain this new provision, in a very simple manner.

Q-1: Which two options do I have?

A-1: You can choose to pay tax as per any of the following two options i.e. Old Tax Regime or New Tax Regime.

Table No. 1:- For tax payers other than senior and super senior citizens:

   

Net Income Range

(Amount in INR)

Slab rates as per old tax regime

(Option-1)

Slab rates as per new tax regime (option effective for F.Y. 2020-21 and onwards)

(Option-2)

Up to 2,50,000

Nil

Nil

From 2,50,001 to 5,00,000

5%

5%

From 5,00,001 to 7,50,000

20%

10%

From 7,50,001 to 10,00,000

20%

15%

From 10,00,001 to 12,50,000

30%

20%

From 12,50,001 to 15,00,000

30%

25%

Above 15,00,000

30%

30%

Old/New Tax Regime- What will help you save Tax

Table No. 2:- For Senior Citizen Taxpayers (i.e. who are60 years or more but below 80 years at any time during the previous year)

   

Net Income Range

(Amount in INR)

Slab rates as per old tax regime

(Option-1)

Slab rates as per new tax regime (option effective for F.Y. 2020-21 and onwards)

(Option-2)

Up to 2,50,000

Nil

Nil

From 2,50,001 to 3,00,000

Nil

5%

From 3,00,001 to 5,00,000

5%

5%

From 5,00,001 to 7,50,000

20%

10%

From 7,50,001 to 10,00,000

20%

15%

From 10,00,001 to 12,50,000

30%

20%

From 12,50,001 to 15,00,000

30%

25%

Above 15,00,000

30%

30%

Table No. 3:- For Super Senior Citizen Taxpayers (i.e. who are 80 years or more at any time during the previous year)

   

Net Income Range

(Amount in INR)

Slab rates as per old tax regime

(Option-1)

Slab rates as per new tax regime (option effective for F.Y. 2020-21 and onwards)

(Option-2)

Up to 2,50,000

Nil

Nil

From 2,50,001 to 5,00,000

Nil

5%

From 5,00,001 to 7,50,000

20%

10%

From 7,50,001 to 10,00,000

20%

15%

From 10,00,001 to 12,50,000

30%

20%

From 12,50,001 to 15,00,000

30%

25%

Above 15,00,000

30%

30%

In both the schemes, Income Tax calculated will be subject to health and education cess @ 4%.

From the above three tables, we note that:-

i) We don't have any separate tax rates for senior or super senior citizens in the new tax regime. They have been granted the same basic exemption limit of Rs. 2,50,000/- in the new tax regime unlike the higher basic exemption limits granted earlier in the old regime. (Refer table 2 and 3 above)

ii) In the old regime, entire income above Rs. 10,00,000/- was taxable @30%, while in the new regime, the income range has been further bifurcated and income above Rs. 15,00,000/- only will be taxed at the highest rate @ 30%.

As clearly mentioned in the tables above, now from F.Y. 2020-21 the tax payers can either follow the Old Tax Regime (i.e. Option-1) or the New Tax Regime (i.e. Option-2).

Q-2: Which taxpayers have this option to pay tax as per the new tax regime?

A-2: Only individuals and Hindu Undivided Family (HUF) can exercise this option to pay tax as per the new tax regime.

Q-3: At what point of time the option has to be selected?

A-3: The option has to be selected at the time of filing Income Tax Return (ITR) for any particular financial year.

Q-4: Whether the option is to be selected every year or only once for F.Y. 2020-21?

A-4: The answer to this question is in two parts:

- The taxpayers who do not have any business income can choose any one of the two options every year and they may change it in any subsequent financial year.

- For taxpayer, who earns business income, there is a restriction. Such taxpayer can choose any one option for F.Y. 2020-21 and he can change it only once in any of the subsequent financial years. Thereafter, he has to stick to that option and will not be allowed to shift to the other option.

Let's take an example to understand this provision.

   

Financial Year

Taxpayer not having business income

(Mr. A)

Taxpayer having business income (Mr. B)

Taxpayer having business income (Mr. C)

2020-21

Option 1 or Option 2

Option 2

Option 1

2021-22

Option 1 or Option 2

Option 2

Option 1

2022-23

Option 1 or Option 2

Option 1

Option 1

2023-24

Option 1 or Option 2

Option 1

Option 1

2024-25

Option 1 or Option 2

Option 1

Option 2

2025-26

Option 1 or Option 2

Option 1

Option 2

In this example, Mr. B, has exercised his onetime right to change the option. He shifted from Option 2 to Option 1 w.e.f. F.Y. 2022-23, but from then onwards, he will have to stick to Option 1.

In the same way, Mr. C, has exercised his onetime right to change the option and shifted from Option 1 to Option 2 w.e.f. F.Y. 2024-25, but from then onwards, he will have to stick to Option 2.

Q-5: What allowances or deductions do I have to forgo if I want to choose the new tax regime?

A-5: As we all know, the option to pay tax at lower rates has come with the condition that the taxpayer will not get the deduction for most of the tax-saving payments/investments made by him during that financial year. Some of the deductions removed in new tax regime are:-

1. Leave Travel Allowance

2. House Rent Allowance

3. Transport Allowance

4. Relocation allowance

5. Helper allowance

6. Children education allowance

7. Other special allowances [Section 10(14)]

8. Standard deduction from income under the head 'salary' (Rs. 50,000)

9. Professional tax/ tax on employment

10. Interest paid on housing loan (Section 24)

11. Contribution to National Pension Scheme (NPS) - Rs. 50,000

12. Saving bank interest (Section 80TTA) - Rs. 10,000

13. Interest income for senior citizens (Section 80TTB) - Rs. 50,000

14. Investments under Section 80C - Rs. 1,50,000, which includes life insurance premium, repayment of housing loan, contribution to PF/PPF, investment in tax saving mutual funds (ELSS), amount invested in Sukanya Samriddhi Yojana, etc.

15. Medical insurance premium

16. Interest on education loan

17. Donations to specified entities like trusts, religious institutions, etc.

However, following two deductions can be claimed:

1. Employer contribution on account of employee in notified pension scheme (Section 80CCD(2))

2. Deductions for salaries paid to new employees (Section 80JJAA) (Applicable to business assessees)

Q-6: Is it mandatory to pay income tax as per this new scheme?

A-6: No it is not mandatory and it is completely optional.

In Option -1/old tax regime/existing tax rates, the taxpayer can continue paying tax as per the existing higher tax rates after deduction tax-saving payments/investments made by him during that particular financial year.

In Option -2/new tax regime/new tax rates, the taxpayer has an option to pay tax on his income at newly introduced lower slab rates but he will not be allowed to claim a deduction of any of the tax-saving payments/investments made by him during that particular financial year.

So the taxpayer can choose any one option, which is beneficial for him/her.

Q-7: Which one is a more beneficial option for me - Old tax regime or new tax regime?

A-7: There cannot be a common answer to this question, because this depends on the income earned and investments made by a taxpayer during a particular financial year. Generally, for taxpayers having high income and high tax-saving investments/payments, the old tax regime will be beneficial and vice versa.

Therefore, every taxpayer has to calculate his/her tax liability, every year, using both the options and should select the one with a lower amount of tax payable.

Q-8: If I want to pay tax using the new lower tax rates, then should I discontinue my tax savings payments/investments etc.?

A-8: Ideally, tax-saving payments/investments should not be linked with tax benefits. It is true that if you are going for new tax regime, then you cannot claim deductions of tax saving payments/investments made by you. But it certainly does not mean that you should stop paying life insurance premium or medical insurance premium or you should stop your regular contribution to PPF or NPS or ELSS or Sukanya Samriddhi Yojana,which are very necessary and beneficial investments for the better financial future of you and your family. Similarly, if you have already taken housing loan, then you have to continue the same for some years to come, no matter which option you choose.

Therefore, investment decisions should be linked with not only tax benefits attached with them but other factors also like your future financial goals, safety of your investments, their return generating capacity, etc.

Q-9: I earn income from salary. My employer is asking me now, at the beginning of the financial year, to choose my option for the payment of tax. Can I change it subsequently at the time of filing my ITR?

A-9: As discussed above, the option has to be selected at the time of filing Income Tax Return (ITR) for any particular financial year. But for salaried employees, the employer has to deduct TDS from salary income and therefore, the income and tax liability is estimated at the beginning of the year and the TDS is deducted accordingly. Therefore, the employer may ask you to choose your option during the financial year, i.e. before the time of filing ITR. Here, you can estimate your tax liability and your tax savings payments/investments to be made during that financial year and can choose any of the options beneficial to you.

 

Please note that you can definitely change that option at the time of filing the ITR, if required. For example, as per your estimated income and deductions, you think that the new regime will be beneficial to you and you submitted declaration to your employer to deduct TDS as per the new tax regime(Option-2). Now, at the time of filing the ITR, after making actual final calculation of income and deductions/investments, you come to know that it is beneficial for you to pay tax as per the old regime (Option-1), then you can file your ITR following the old regime, irrespective of any of the options chosen earlier.

To put it straight, the option which you choose and exercise at the time of filing of ITR will be final for that particular financial year.

Here I have tried to cover all the doubts and queries which I have received till date.

I hope that this write-up will help you to understand the revised provisions related to income tax in better way and do your financial planning accordingly.

 

The author CA Hansini Y. Buch is a practicing Chartered Accountant and can also be reached at hansinibuch@yahoo.com.

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