Finance Minister Nirmala Sitharaman announced the new tax regime in Budget 2020 giving taxpayers the option to choose between it and the existing tax structure when they file their taxes. While your income will be taxed at lower rates as per the new tax slab, there is a catch. You will no longer be able to utilise the deductions under the Income Tax Act as earlier, to lower your tax liability any further.
As per government estimates, 5.3 crore tax payers out of a total of 5.78 crores claim tax exemptions amounting to less than Rs 2 lakh. The most popular of these include investments in Public Provident fund, life insurance, tax –saving fixed deposits etc most of which fall under the Rs 1.5 lakh maximum limit provided as per Section 80C
An additional tax benefit is available for contributions of upto Rs 50,000 to National Pension scheme as per 80CCD(1B) provisions taking the total to Rs 2 lakh. However, if you fall in the higher tax bracket and are looking forward to tax saving for income above 15 lakhs as you get ready to fill your income tax return for FY 2019-20, here are a few things to keep in mind:
If you do not invest in tax-saving instruments : In her budget speech, the Finance Minister explicitly stated that a person with an annual income of Rs 15 lakh not availing any deductions as per the proposed tax structure will have to pay only Rs 1.95 lakh as tax as opposed to Rs 2.73 lakhs in the old regime. To achieve this, you have to let go of tax benefits elucidated under Chapter VI A of the Income Tax rules as well as the standard deduction of Rs 50, 000 for FY 2019-20. New tax rules allow for greater tax saving for income above 15 lakhs in this case, as illustrated below.
|S.No||Old tax structure||Tax calculation||New tax structure||Tax calculation|
|1||5%||12, 500||5%+ 10%||12,500+ 25,000|
|6||Income tax||2,73000||Income tax||1,95000|
2. If you invest up to 1.5 lakh: If you have invested in Public Provident Fund, Employees Provident Fund, Sukanya Samriddhi Scheme, life insurance or health insurance premium, tax-saving fixed deposits from banks or post offices or any other provisions that allow tax exemption to the tune of Rs 1.5 lakh, you would still stand to lose Rs 31,200 in tax saving for income above 15 lakhs by following the old school tax paying method. The new tax regime would work in your favour even in this case. It allows you to claim tax benefit on income from life insurance and agriculture, proceeds from voluntary retirement scheme, rent paid, encashing your leaves on retirement and compensation due to company downsizing.
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3. If you avail deductions worth 2.5 lakh or more: If your annual income is between 15 lakhs to 20 lakhs and you claim tax deductions worth 2.5 lakh, you have the option to choose between either of the two regimes since the tax payable will be more or less the same. However, if you are focussed on tax saving for income above 15 lakhs and the amount of exemption in tax sought by you is more than 2.5 lakhs, it is prudent to stick to the old method of tax computation. Let us understand this by looking at tax computation by both methods for a person drawing an yearly salary of Rs 20 lakhs
|Details||Tax calculation(Old)||Tax calculation(New)|
|Income under salary||19, 50000||20,00000|
|Chapter VI A exemptions||150000||Nil|
|Income tax||3, 37, 500||3, 37,500|
|4% cess||13, 500||13,500|
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Hi I am Radhika Palkar, a practising Chartered Accountant mainly working as an advisor to foreign companies with regards to managing their operation in India. I also take keen interest in associating myself with startups, from the stage of incorporation bookkeeping to income tax filling as well in advising the management in cost price analysis, that we act like a virtual CFO for the entities in their growth phase I am here today as part of the Tax video series for Canara HSBC Life Insurance Company. Here’s an important question that I often get asked- If my salary is above 15 Lakhs, how do I save tax effectively. Well let’s figure out how:
On first look, the new tax structure seems better, but one always needs to dig deeper. The suitability of the tax structure will vary depending on the level of investments one makes.
Taxpayers have to choose the right tax regime based on their income structure, type and investments to derive maximum tax benefits. Based on their profile they should decide whether to opt for lower income tax rates or exemptions/deductions.
Let us check with one example :
Suppose Mr. X earned a salary amounting to Rs. 16,00,000 for the F.Y.20-21 Calculation of total income and tax liabilities in both case
|Particulars||Under Old regime||Under New regime|
|Income under the head salary||15,50,000||16,00,000|
|Chapther VIA deduction (Rs 1.5 lacs under Section 80C and Rs 50000 under Section 80D) 2,00,000||2,00,000||-|
|Income tax (As per Rate)||2,17,500||2,17,500|
|Total Tax payable||2,26,200||2,26,200|
As we can see from the above example, a salaried individual having income of Rs.16 lakhs and claiming a deduction of Rs.2.5 Lakhs (Rs 2 lacs under Chapter VIA and Rs 50000 standard deduction) would be liable to pay same amount of tax under both the tax regimes.
However, if the total deduction claimed by assesse is less than Rs. 2.5 lakhs, it is better for the assesse to opt for new tax regime. On the other hand, if the assesse opts for additional deduction under Chapter VIA like contribution towards NPS under Section 80CCD(1B) ***, then the assesse would be liable for additional deduction of Rs 50000 over and above Rs 2 lakhs under Chapter VIA, thus making the total deduction of Rs 3 lacs. In this case, paying under the old regime is a better option for the assesse
*** The Contribution made towards NPS can be claimed as a deduction under section 80CCD(1B) under the Old Tax Regime which is in addition to the Deduction of Rs 2 lacs as shown above
Amount of deduction: up to Rs 50,000
Applicability: Any individual taxpayer who has deposited any amount in his NPS account. The NPS covers New pension scheme and Atal Pension Yojna.
Thus, if an investment is made as per Section 80CCD(1B), then it is better to opt for old regime as the tax liability would reduce further..
Unfortunately, there is no single answer to this. And the culprit again is the complexity of the Indian tax rules. While figuring out what option to go for might look complicated, if you approach it in a systematic way, it is not that difficult to figure out.
In a simpler way, Here is what the assesse needs to do –
Now, combine these exemptions and deductions and minus them from your salary to see what is your taxable income and what it would be if you let go of these deductions. This should be the deciding factor for which regime you should go for.
Hope this video gives individuals with an annual salary above rupees 15 lakh a fair idea of which tax regime to opt for