The Union Budget for 2020 was announced recently and it has proposed a new tax structure for the upcoming fiscal year 2020 – 2021. This tax structure has decreased tax rates but has a new check on the investments that you can claim. The Government has given the option for taxpayers to choose between the existing tax structure or the new tax structure when filing taxes.

If you feel like you’re no expert on taxes, worry not. In this blog we will break down the two tax structures and analyse which one would suit your needs better.

Current tax structure 

According to the current tax structure, employee salaries will be taxed progressively under the following slabs:

Note: Apart from these tax rates, 4% education cess will be applied additionally to all income slabs.
Surcharge of 10%  on tax will be applicable for total income between ₹50L and ₹1C
Surcharge of 15% on tax will be applicable for total income over ₹1C
Surcharge of 25% on tax will be applicable for total income between 2Cr and 5Cr
Surcharge of 37% on tax will be applicable for total income over 5Cr

These slabs will be applicable after the taxpayers claim deductions and exemptions from the gross salary allowed in the taxation law.
Example:  Say you are a salaried individual earning ₹12L per annum. Your entire income will be taxable as such:
Up to 2.5L -> No tax
2.5L – ₹5L -> 5%
₹5L – ₹10L -> 20%
₹10L – ₹12L -> 30%

You can reduce this taxable amount by taking advantage of various exemptions mentioned in the current income tax law. If you invest ₹2L, you can bring your taxable income down to ₹10L, meaning you will be taxed under the 2.5L – ₹5L and ₹5 – ₹10L slab and avoid tax for that ₹2L.

Proposed tax structure for FY 2020-21

The Government has proposed a new tax structure with reduced tax rates for the various income slabs. However, under this structure, taxpayers can claim very limited deductions or exemptions to reduce their taxable income.
The new tax slabs are as follows:

Taxpayers now have the option to choose between the current tax structure, (where they can claim exemptions) and the new tax structure (with reduced tax rates but limited exemptions) for each financial year.

Evaluation of these tax structures for different income slabs 

With the option to choose between two structures left to taxpayers, let’s see how taxes actually vary under the two regimes.

Case 1: Salaried individual is not claiming any exemptions or deductions

When no deductions are claimed, taxes under the old regime are considerably higher for all income slabs than taxes under the new regime.

Case 2: Salaried individual is claiming basic exemptions or deductions

These basic deductions include Standard Deduction of 50,000, deduction of 1.5L under 80C, exemption of 25,000 of medical premium under 80D.

If the taxpayer were to claim basic exemptions under the old regime, as long as their total income falls under ₹12.5L, they will incur fewer taxes than under the new regime. However, the income tax under the new regime becomes less for higher income slabs.

Case 3: Salaried individual is claiming the maximum exemptions or deductions

If a taxpayer claims the maximum deductions under the old regime, their taxes would be significantly less than the taxes incurred under the new regime.
From the scenarios above, we can conclude that the current tax regime would benefit:

  • Taxpayers in higher-income groups with moderate-to-heavy tax-saving investments.

The new regime would benefit:

  • Taxpayers who have just started working and draw salaries less than ₹12L.
    Taxpayers who do not make use of HRA, 80C, or medical insurance.

Included and excluded exemptions in the new tax structure 

Excluded Deductions/Exemption

Approximately 70 exemptions cannot be claimed in the new tax structure. These include:

  • Leave Travel Allowance (LTA)
  • House Rent Allowance (HRA)
  • Standard Deduction of ₹50,000 on salaries
  • Deductions of up to ₹1.5L available under section 80C for specified investments in PF, NPS, life insurance premium, home loan principal repayment, etc.
  • Donations to charitable organizations
  • Deduction for medical insurance premium
  • Deduction available under section 80TTA/80TTB
  • Interest paid on a housing loan taken for a self-occupied or vacant house property
  • Disability under sections 80DD and 80DDB
  • Education loan interest under section 80E
  • All deductions under chapter VIA, such as section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc.

Included Deductions/Exemptions

  • Interest received on post office savings account balances
  • Gratuity received from your employer
  • Amount received on maturity of life insurance
  • Interest received up to 9.5% per annum from EPF
  • Interest and maturity amount received from PPF
  • Employer’s contribution up to ₹7.5L to your EPF/NPS account
  • Payment received from NPS account
  • Gift from employer up to ₹5000.
  • Food coupons
  • Leave encashment on retirement
  • VRS amount
  • Half of the commuted pension to employee

The new tax structure will be effective starting April 1, 2020. After this date, taxpayers can evaluate the two tax regimes for their salaries and choose one of them.

What should employers do? 

Employers should focus on educating their employees about the new tax structure, so employees can make a well-informed decision. Employers should be well-equipped to handle the tax calculations according to both tax structures and help the employee find the best structure for their needs.

As an employee, what should I know?  

You should figure out what tax regime you want to choose before March 31, 2020. If you are an ardent fan of investments and are willing to claim deductions, you can go with the existing tax structure. If your income falls within the first three tax slabs and if you’re not too keen on investing, you can choose to file taxes according to the new tax structure.

Managing tax structures with Zoho Payroll 

Zoho Payroll will be compliant with the old and new tax regimes from April 1, 2020, following which employers can manage tax calculations for both the regimes within the application.

Employees can assess the tax regimes using our online Income Tax calculator and go with the one, apt for their salary structure and investments. If you have any questions, you can reach out to us at support@zohopayroll.com.

References:
  • https://economictimes.indiatimes.com/wealth/tax/incomes-that-are-exempted-under-the-proposed-new-tax-regime/articleshow/74074285.cms
  • https://economictimes.indiatimes.com/wealth/tax/salaried-claiming-main-tax-exemptions-unlikely-to-gain-from-new-tax-regime/articleshow/73842885.cms?from=mdr
supriya.a
Technical Writer, Zoho Payroll