From FY 2020-21, taxpayers can select between two earnings tax regimes – the existing/old tax program and the brand-new, concessional one. By opting for the existing tax regime, the taxpayer can continue to get existing deductions such as section 80 C, area 80 D etc. of the Income-tax Act, 1961 and tax exemptions like home rent allowance, LTC Cash Voucher Plan etc. The brand-new, concessional tax routine provides lower tax rates as compared to the old tax routine, by deciding for the new program the taxpayer will have to pass up most tax reductions and exemptions that are available under the existing program.
Here are the current income tax rates and slabs under the new tax program for FY 2020-21
|Earnings tax slabs (Rs)||Income tax rates (%)|
|As Much As 2,50,000||Nil|
|From 2,50,001 to 5,00,000||5|
|5,00,001 to 7,50,000||10|
|7,50,001 to 10,00,000||15|
|10,00,001 to 12,50,000||20|
|12,50,001 to 15,00,000||25|
As it can be seen from the table above, unlike in the old tax regime where the highest tax rate of 30%is imposed on people having earnings starting from Rs 10,00,001, the highest tax rate in the new tax program is levied on people having earnings beginning with Rs 15,00,001
Do keep in mind that commonly availed reductions such as investments in Workers’ Provident Fund (EPF), Public Provident Fund (PPF) etc or tax exemption on lease paid or food coupons got etc will not be offered under the brand-new tax regime. Just deduction under section 80 CCD (2) of the Income-tax Act, i.e., deduction on the company’s contribution to the Tier-I NPS account is readily available in the brand-new tax regime. The maximum deduction that can be declared is 10%of basic wage plus dearness allowance (DA) in a fiscal year by a specific (14%applies for a main civil servant).
Efficient from FY 2020-21, aggregate contribution to PF, NPS and superannuation funds exceeding Rs 7.5 lakh in a fiscal year will be taxable in the hands of a staff member. Further, any interest, dividend and so on earned on excess contribution will be taxable in the hands of a worker.
How to understand which tax program is advantageous for you
If you are confused about which tax program will be useful for you, then you require to determine the earnings tax liability inclusive of cess at 4%under both tax programs. As soon as you have computed the earnings tax liability in both tax regimes, you can pick the one where your tax liability is lower.
You can use ET Wealth’s income tax calculator to know in which tax routine your tax liability will be lower.
Click here to use the income tax calculator.
Based on chartered accountants and tax experts, anyone claiming more than Rs 2.5 lakh in deductions in a financial year will not gain from changing to the brand-new tax structure.
Which tax routine is helpful for you – old or new?
Things to remember while choosing brand-new earnings tax program
As per earnings tax laws, employed people and pensioners not having service income are eligible to choose between the new and old tax programs every fiscal year. This would imply that if you have opted for the new tax program in FY 2020-21(on-going financial year), then you can select the old tax program in the next fiscal year, i.e., FY 2021-22
However, if an individual has service income and choose the brand-new tax routine in FY 2020-21, then the taxpayer will continue to pay tax as per the new tax routine for all future fiscal years. Such individuals do not have the alternative to pick between the 2 tax programs in every financial year.
Nevertheless, people with company earnings who have gone with the brand-new tax routine have when in a lifetime choice to switch back to the old tax routine. When this choice of switching back is exercised, then the individual can not choose the new tax program again.
Under both the tax routines, if a person’s earnings does not surpass Rs 5 lakh in fiscal year, then a refund of Rs 12,500 is readily available. Thus, regardless of which tax routine is picked, no tax will be payable by a private if his/her income does not go beyond Rs 5 lakh in financial year.
There is no increased fundamental exemption limit offered for senior citizens and incredibly seniors under the brand-new tax regime. Specific irrespective of his/her age will have basic exemption limitation of Rs 2.5 lakh in a fiscal year, if brand-new tax regime is decided.
According To the Central Board of Direct Taxes (CBDT) circular dated April 13, 2020, for TDS on wage, as soon as the option of tax program is communicated to the company, then the staff member can not alter the option of tax routine throughout the fiscal year. Nevertheless, at the time of filing tax return, a person will have an alternative to change to any tax routine of his/her choice, irrespective of what has actually been communicated to the employer.