The Honorable Finance Minister, Nirmala Sitharam in Budget 2020 has introduced a new personal income tax regime for individual taxpayers. The income tax rates have now been reduced with new income tax slabs. However, to opt for the new tax regime, you shall be required to forego certain specified income tax deductions.
These include all the most of the investment and expenditure linked deductions such as deductions under Chapter VI-A of the Income Tax Act, 1961 (including the deduction of Rs. 1,50,000 under Section 80C). Other deductions such as Standard Deduction of Rs. 50,000 and deduction of up to Rs. 2,00,000 for the Interest Paid on housing loans for the self-occupied property have also been kept out of the ambit for the new personal income tax regime.
List of deductions removed in the new Personal Income Tax Regime:
Given below is a list of common deductions that are not available under the new regime:
- Standard Deduction of Rs. 50,000
- Deduction for House Rent Allowance
- Deductions under for contribution to the Provident Fund, LIC premium, and National Pension Scheme
- Deduction for payment of Health Insurance Premium
- Deduction for payment of interest for education loan
- Deduction for interest income from savings account
- Deduction for payment of interest on housing loan for self-occupied property
- Deduction for Leave Travel Allowance
The deductions that have been disallowed under the new regime are availed by majority of the taxpayers. As a result, there is a lot of confusion amongst the taxpayers, since most are not sure whether to opt for the new regime or continue with the old regime.
The benefits of opting for the new income tax regime?
1. Increased take-home salaries
Even though the majority of deductions are not available under the new regime, it still may be beneficial to a lot of taxpayers. Individuals who have recently started working or the individuals who want to invest less and increase their take-home salaries can now do so by opting for the new regime.
In case you don’t want to contribute a hefty part of your salary in the provident fund, pension schemes, LIC premiums and are not planning to avail any home loan/ education loans, the new regime shall be a great opportunity for you to save taxes by investing/ spending less part of your Income.
2. Flexibility in making investments decisions
Under the old tax regime, the taxpayer was given deductions based on the investments that were made in certain specific instruments and schemes as prescribed by the Income Tax Act. This restricted the investment decisions of the taxpayer as he was to make investments only in specified schemes in order to save taxes. However, under the new regime, the taxpayer has the flexibility of making customized investment decisions.
3. Easier compliance due to reduced complexity of the computation of tax liability
Computation of the estimated tax liability and filing of Income Tax Return after the end of the financial year shall become much easier for the taxpayer. This is due to the reduction in complexity of computing various deductions and non-requirement of provision of documentation for claiming the investment and expenditure linked deductions.
In case you are wondering what is the most tax-efficient regime for you, we have created a comprehensive Income Tax Calculator for you where you can compare the your Total Tax Liability and Effective Tax Rate under both the regimes!
Income Tax Calculator for Financial Year 2020
Based on the comparison of the Total Tax Liability and Effective Tax Rate on your Gross Income, it is easy to decide as to which is the most tax-efficient regime.
Further, the Government has provided flexibility to choose between the two regimes for every financial year, hence, you can opt back for the old regime in the subsequent year in case you opt for the new regime in the current financial year.
In light of the above, it is advisable that you take advice from your financial/ tax advisor before opting for the new tax regime.
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