Dheeraj Jandial
With Tax policy being critical for revenue generation and intensification of the growth cycle, the Union Finance Ministry carried out fundamental structural reforms in the Income Tax Slabs by announcing about the simplified New Income Tax structure.
In floating the option for the tax payers with restructured slabs without any exemption or to continue with existing structured system with exemption so admissible, the Union Finance Ministry has tried to innovate mechanism of comforting the income tax payers. This optional Income tax regime is rather a confusing proposition, especially for the layman. The emphasis on making the law ‘simple’ is a contradiction at least in its applicability to the computation of income tax on salaries. While some people have welcomed the new regime, other are confused whether they should switch to the new tax structure or stay put under the existing regime. However, the Tax experts say the new income tax structure has its own benefits and drawbacks depending upon on how much an individual earns annually. The tax regime is based on the principle of ‘Accept it or Leave it’.
A GLANCE AT NEW & EXISTING TAX RATES
* Surcharge is levied on income above Rs 50 lakh. Health and Education cess at the rate of 4 per cent will be added to the income tax liability in all cases. Individuals having taxable income of up to Rs 5 lakh will be eligible for tax rebate under section 87A up to Rs 12,500, thereby making zero tax payable in the new tax regime.
THE NEW REGIME- IS IT GOOD?
The new income tax is beneficial for people with low investments in policy schemes. It offers seven lower tax slabs. Anyone paying taxes without claiming exemptions under the existing system can benefit from paying a lower upfront rate of tax. Therefore, for those investing less in tax-saving schemes must opt for the new regime. Another benefit of switching over to the new optional regime is not having to worry about complex filings, hence fewer mistakes in filing. It is rightly asserted that the process under the new income tax structure will be much easier for taxpayers. It’s an optional scheme so people have the flexibility to switch over from one system to after evaluation for the previous year is complete. The exclusion of 70 exemptions also helps in containing income tax frauds. Cases abound where people have inflated their return filing for claiming more tax refunds. Now, with a majority of exemptions gone under the new system, the scope of misusing exemptions rules also reduces. Some of the exemptions available under the new tax regime are Leave encashment on retirement, Retirement compensation, Death-cum-Retirement benefit, Employer’s share of employee Provident Fund, Money received as scholarship for education, Amount received on VRS, etc. Thus, Under the new tax regime, an individual is eligible for only one deduction under section 80CCD (2). This section allows deduction on the employer’s contribution to the NPS account for maximum of 10 per cent of the employee’s salary (salary here means basic plus dearness allowance)
THE NEW TAX STRUCTURE: IS IT BAD?
The new tax regime introduces lower tax rates in lieu of exemptions. It is good for people with low investments. The people who already have invested a fair amount in tax-free saving schemes like PPF, NPS and claim deductions on them will undoubtedly suffer. Therefore, even those opting for the new system with lower tax rate, will ending paying more tax as there are no exemptions for them to claim. The new tax regime can potentially lower household savings as many people will refrain from investing in tax free schemes due to exclusion of 70 common exemptions. Despite an upfront reduction in the tax rate, it will affect long term savings of an individual. Some experts suggest that the new income tax structure could also discourage investments in the real estate sector. It may be noted that investment in housing property is a major tax saver for Indian households and making the full use of it can earn very heavy tax deductions. However, with no such exemptions under the new tax structure, the real estate sector could encounter fall in demand. The insurance sector will also suffer as it will have to put more effort and money on advertisements to attract people to invest. The new income tax structure, therefore, may lead to reduced business for insurance companies..
A COMPARATIVE ANALYSIS ON NEW & OLD STRUCTURE
AS PER EXISTING TAX SLABS APPLICABLE ON INCOME DURING FY 2020
AS PER NEW TAX SLABS APPLICABLE ON INCOME DURING FY 2021
THE CBDT CIRCULAR AND
CLARIFICATION
The Central Board of Direct Taxes (CBDT) in a circular issued on April 13, 2020 has clarified and addressed the issue of tax deduction at source from an employee’s salary in case the employee opts for new tax regime in FY 2020-21.
As per the circular, an employee having income other than the business income (such as salary income etc.) will have to inform his/her employer of his/her choice of tax regime for the ongoing FY 2020-21. The employer will have to deduct taxes from the employee’s salary accordingly.
The circular clarifies that once the regime is opted by an individual at the start of the financial year, then such option cannot be changed during the financial year. However, as per the circular, the option can be changed at the time of filing of income tax return.
To sum up the gist is as under:-
The tax calculated on the basis of such rates will be subject to health and education cess of 4%.
Any individual opting to be taxed under the new tax regime from FY 2020-21 onwards will have to give up certain exemptions and deductions.
Points to remember while opting for the new tax regime:
Option to be exercised on or before the due date of filing return of income for AY 2021-22
In case a taxpayer has a business income and exercised the option, he/she can withdraw from the option only once. A business taxpayer withdrawing from the optional tax regime has to follow the regular income tax slabs.
NO BOOST FOR INDIVIDUAL SAVINGS
While expectations typically have no end to them, one of the common expectations which had been at the top of the wish list for few years now is increasing the exemption limit under section 80C.
Section 80C is at the core of tax saving for all categories of individuals. Whether the individual is a Government employee, privately employed or for that matter working in an NGO, use the section 80C basket to save on tax.
The limit of deduction under section 80C, was last increased from Rs 1 lakh to Rs 1.5 lakh in Budget 2014; which is almost six years ago. Accordingly, expanding the horizon and limits of the 80C deduction was need of the hour.
It was expected that the overall exemption limit under section 80C would be enhanced to at least Rs 2.50 lakh from the current Rs 1.5 lakh. Similarly, while increasing the limits under 80C, concurrently the limit of investment under PPF, NPS (Tier-II) would be increased.
The expectation was based on the two-fold premise. Firstly, the enhanced savings for seeking deduction in tax would afford the government liquidity, and secondly, this move would have satiated the yearning of the employee for seeking change in tax structure limits.
Pertinent to mention here is that Section 80C was reintroduced in Budget 2005 as a replacement to section 88 with the inherent intention of moving from an EEE (exempt at contribution, exempt on accrual, and exempt on withdrawal) regime to EET (exempt at contribution, exempt at accrual, and taxed on withdrawal) one which is generally the preferred system in developed economies.
OWNING HOUSE- RELIEF EXTENDED
To boost the flagging real estate sector, in Budget 2019, the government had introduced an additional deduction of Rs 1.5 lakh on home loan interest payment if you purchase a new house between April 1, 2019 and March 31,2020. The Budget has extended this by a year. What this means is that you can claim this deduction if you buy a new house between April 1, 2020 and March 31, 2021, and meet the eligibility conditions. This is in addition to the Rs 2 lakh deduction available under section 24b. To be eligible for this additional deduction, the value of the house should also not be more than Rs 45 lakh. You should also not hold any other house on the day the loan is sanctioned.
RETIREMENT CONTRIBUTION BY EMPLOYER CAPPED AT Rs. 7.5 Lakh
Earlier, salaried employees who were in the highest income tax bracket had the flexibility to restructure their salary in such a way that the employer could make higher contribution towards Employees’ Provident Fund (EPF), NPS or superannuation fund. But during the financial year 2020-21 the exemption on such contributions is capped to Rs 7.5 Lakh in a financial year. “Tax saving by optimizing the salary structure using NPS and superannuation may no longer be valid given the proposal on combined limit to employer contributions to provident fund, superannuation fund and NPS. The employers may have to revisit their compensation policies in view of the proposed amendment”, opine experts.
With Tax laws coded in incomprehensible language, the dilemma and dichotomy of the salaried class is best ascribed in the Urdu couplet by Mohammad Alvi, “kyuun sar khapa rahe ho mazamin ki khoj mein; kar lo jadid shaeri lafzon ko jod kar”
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