How much tax do I need to pay under Budget 2020? (Old vs New)
“In this world, nothing can be said to be certain, except death and taxes,” these words by Benjamin Franklin, one of the founding fathers of the US, are still relevant. Taxes are certain, but the rates definitely change, as it happened recently in India. The Finance Minister Nirmala Sitharaman announced a new tax regime along with the Union Budget 2020. In one of the biggest income tax reforms in the country, the finance minister has introduced the new tax rate slabs.
The government, however, made the new tax rates optional and added a condition. If you opt for the new tax structure, you will have to forego all the deductions allowed under the existing tax structure like the premiums paid for life and health insurance. Let us take a look at the income tax rates under the existing structure and the changes under the new tax structure vs the old one.
Existing Tax Structure
Under the existing tax system, the income tax varies as per the age of the assessee. Taxpayers have been divided into three categories—below 60 years, between 60 and 80 years and over 80 years.
An annual income of up to Rs 2.5 lakh is exempted from income tax, while income between Rs 2.5 lakh and Rs 5 lakh is taxable at 5%.
An annual income between Rs 5 lakh and Rs 10 lakh is taxed at 20%, while income above Rs 10 lakh is taxed at 30%.
All the income tax slabs remain the same, just the income exempted from tax is Rs 3 lakh instead of Rs 2.5 lakh
An annual income of Rs 5 lakh is exempted from income tax without availing any rebate. Tax on other slabs remains the same.
Individual having , an annual income of up to Rs 5 lakh has effectively been made tax free by offering a rebate under Section 87A of the Income Tax Act, 1961.
People who have an annual income of over Rs 50 lakh have to pay an additional surcharge on the amount of the income tax. For instance, the surcharge for income between Rs 50 lakh and Rs 1 crore is 10%. It is 37% for income exceeding Rs 5 crore, with different rates of surcharge for other income slabs.
There is an additional 4% Health & Education Cess that needs to be paid on every front on the amount of income tax and surcharge being paid.
New Tax Structure
In contrast to the existing tax structure, the latest tax structure has more income slabs and lower tax for people earning less than Rs 15 lakh. Income below Rs 5 lakh remains tax-free with rebate. An annual income between Rs 5 lakh and Rs 7.5 lakh will be taxed at 10% and income between Rs 7.5 lakh and Rs 10 lakh at 15%.
Similarly, income between Rs 10 lakh and Rs 12.5 lakh will be taxed at 20%, while an income between Rs 12.5 lakh and Rs 15 lakh will be taxed at 25%. The tax on income above Rs 15 lakh is 30%, the same as under the existing tax structure.
Which is better?
On first look, the new tax structure seems better, but one needs to dig deeper. Under the new tax structure, the tax rates are low, especially for people earning less than Rs 15 lakhs. For instance, someone earning Rs 10 lakh a year, will save Rs 37,500 in taxes under the new tax structure. However, under the latest tax structure, you will not be able to avail any tax exemptions or deductions.
Some of the common exemptions are house rent allowance and leave travel allowance which will not be available, while some popular deductions are those allowed under Section 80C and Section 80D of the Income Tax Act, 1961 will also not be available.
The suitability of the tax structure will vary depending on the level of investments one makes. Take into account all the exemptions you get and the deductions you are eligible for. Add up the exemptions and deductions and deduct them from your annual income. If your taxable income is lower, then it is not advisable to adopt the latest tax structure.
The existing tax structure incentivises savings and investments. People invest in financial products and are rewarded for it. You can invest in iSelect Star Term Plan by Canara HSBC Oriental Bank of Commerce Life Insurance and avail tax deduction up to Rs 1.5 lakh in a year under the existing tax structure. The iSelect Star Term Plan offers safety with tax savings.