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Budget 2020: Changes in Personal Income Tax rates

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In our previous article we took a look at key highlights of Budget 2020. Now let’s take a detailed look at the changes in personal income tax rates.

The Budget has proposed lower income tax rates for individuals as shown below:

    Sr. No. Income Slab Existing Regime New Regime
(without exemptions and deductions
        1 Less than Rs. 2.5L NIL               NIL
        2 Rs. 2.5L – Rs. 5L 5%               5%
        3 Rs. 5L – Rs. 7.5L 20%               10%
        4 Rs. 7.5L – Rs. 10L 20%              15%
        5 Rs. 10L – Rs. 12.5L 30%              20%
        6 Rs. 12.5L – Rs. 15L 30%              25%
       7 More than Rs. 15L 30%              30%

* This is for individuals below 60 years of age

We take a look at two cases – one where taxable income is same in new and old regime (Case A) and the other where Gross Salary is same in new and old regime

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Case A – Same taxable income in new and old regime

Individuals can choose between either of the tax regimes. In case they choose the new regime with lower taxes, they will have to forego exemptions and deductions claimed in the old regime. The following is an example of tax implication in case of taxable income of Rs. 15L, assuming the person is not claiming any deductions. In this case, an individual will save Rs. 78,000 worth of tax.

Income
Slabs
Incremental
Income
Tax rate in
Existing Regime
Amount
(Rs.)
 
Tax rate in
proposed Regime
Amount
(Rs.)
  Tax
Reduction
Rs. 0L – Rs. 2.5L 250,000 0%   0%    
Rs. 2.5L – Rs. 5L 250,000 5% 12,500   5% 12,500    
Rs. 5L – Rs. 7.5L 250,000 20% 50,000   10% 25,000    
Rs. 7.5L – Rs. 10L 250,000 20% 50,000   15% 37,500    
Rs. 10L – Rs. 12.5L 250,000 30% 75,000   20% 50,000    
Rs. 12.5L – Rs. 15L 250,000 30% 75,000   25% 62,500    
  Tax implication (Rs.) 262,500     187,500    
  Health & Education
Cess @ 4% (Rs.)
10,500   H&E Cess- @4% 7,500    
  Total Tax Implication (Rs.) 273,000   Total Tax 195,000   78,000
                 
  Avg Tax Rate   18.20%     13.00%   5.20%

Summary of tax saving for different income brackets:

    Tax Implication (Rs.)  
Sr. No. Taxable Income (Rs.) Earlier Case New Case Saving (Rs.)
       1 0 – 2,50,000
       2 2,50,000 – 5,00,000
       3 5,00,000 – 7,50,000 13,000 – 65,000 13,000 – 39,000 0 – 26,000
      4 7,50,000 – 10,00,000 65,000 – 1,17,000 39,000 – 78,000 26,000 – 39,000
      5 10,00,000 – 12,50,000 1,17,000 – 1,95,000 78,000 – 1,30,000 39,000 – 65,000
      6 12,50,000 – 15,00,000 1,95,000 – 2,73,000 1,30,000 – 1,95,000 65,000 – 78,000

Case B – Same gross salary in new and old regime

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The new tax regime has a catch. In case an individual chooses to use all deductions and exemptions (which most people WILL do), then he / she will end up saving tax in the old regime. There will be no incentive to switch to the new regime.

OLD Regime New Regime
  Salary Income 1,500,000     Salary Income 1,500,000  
Deductions: 80C 150,000   Deductions:    
  80D – Medicliam 25,000        
  80CCD – NPS 50,000     80CCD (2) – NPS 50,000  
  Hsg Loan int 200,000        
  Std Deduction 50,000        
  80G – Donations 50,000        
  Taxable Income 975,000     Taxable Income 1,450,000  
  <2.5L 250,000   <2.5L 250,000
  2.5L – 5L @ 5% 12,500 250,000   2.5L – 5L @ 5% 12,500 250,000
  5L – 10L @ 20% 95,000 475,000   5L – 7.5L @ 10% 25,000 250,000
          7.5L – 10L @ 15% 37,500 250,000
          10L – 12.5L @ 20% 50,000 250,000
          12.5L – 15L @ 25% 62,500 250,000
  Tax Payable 107,500          
  Cess @ 4% 4,300     Tax Payable 187,500  
  Total Tax 111,800     Cess @ 4% 7,500  
          Total Tax 195,000  

The below table summarizes tax loss incurred by adopting the new regime as against retaining old regime and availing all exemptions and deductions:

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Speculators1
    Tax Implication (Rs.)  
Sr. No. Taxable Income (Rs.) Earlier Case New Case
Extra tax implication (Rs.)
      1 0 – 2,50,000
      2 2,50,000 – 5,00,000
      3 5,00,000 – 7,50,000 0 – 33,800 0 – 33,800
      4 7,50,000 – 10,00,000 33,800 – 70,200 33,800 – 70,200
      5 10,00,000 – 12,50,000 0 – 59,800 70,200 – 1,19,600 10,400 – 59,800
      6 12,50,000 – 15,00,000 59,800 – 1,11,800 1,19,600 – 1,95,000 59,800 – 83,200


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