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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| 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 |