The highlight of Budget 2020 speech was “new, simple and reduced income tax slabs”. It was very well received by the audience and people were exited that they would save a lot of money!
But as usual the devil lies in the details. We went through the finance bill and as we read through it seemed like the new tax slab structure would be beneficial for only very special cases and that too marginally.
Existing Vs New Tax Slabs (without tax exemptions) in Budget 2020
If you would have heard Finance Minister speech, she talked about forgoing some deductions if you want to avail new tax slab.
List of deductions excluded from New Tax Regime (Section 115BAC)
- Leave travel concession as contained in clause (5) of section 10;
- House rent allowance as contained in clause (13A) of section 10;
- Some of the allowance as contained in clause (14) of section 10;
- Allowances to MPs/MLAs as contained in clause (17) of section 10;
- Allowance for income of minor as contained in clause (32) of section 10;
- Exemption for SEZ unit contained in section 10AA;
- Standard deduction, deduction for entertainment allowance and employment/professional tax as contained in section 16;
- Interest under section 24 in respect of self-occupied or vacant property referred to in sub-section (2) of section 23. (Loss under the head income from house property for rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law);
- Additional deprecation under clause (iia) of sub-section (1) of section 32;
- Deductions under section 32AD, 33AB, 33ABA;
- Various deduction for donation for or expenditure on scientific research contained in sub-clause (ii) or sub-clause(iia) or sub-clause (iii) of sub-section (1) or sub-section (2AA) of section 35;
- Deduction under section 35AD or section 35CCC;
- Deduction from family pension under clause (iia) of section 57;
- Any deduction under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc). However, deduction under sub-section (2) of section 80CCD (employer contribution on account of the employee in notified pension scheme) and section 80JJAA (for new employment) can be claimed.
I have highlighted the common tax exemptions for most salaried.
Below is an estimate of tax exemptions you might have to forgo for new tax regime.
- Standard Deduction – Rs 50,000
- 80C – Rs 1,50,000
- 80CCD(1B) – Rs 50,000
- 80D – Rs 25,000 (assumed)
- LTA – Rs 25,000
- HRA/Interest on Home Loan – Rs 2,00,000
- Total = Rs 5 Lakhs
You need to forgo Rs 5 lakh tax deduction to shift to new tax regime. I do not see how it would make any sense. The new regime is only beneficial to people who had very tax inefficient salary or did not avail on any deductions in the past (like senior citizens on interest & pension income). We show this by some examples:
Reduced Tax Slabs in Budget 2020
New Vs Old Tax Slab comparison
Also Read: 25 Tax Free Incomes & Investments in India
Salary Income: 15 Lakhs
Assuming a salaried person has total income of Rs 15 Lakhs and claim tax exemption of Rs 3 lakhs as follows:
- Standard Deduction – Rs 50,000
- 80C – Rs 1,50,000
- 80CCD(1B) – Rs 50,000
- 80D – Rs 25,000
- LTA – Rs 25,000
What would be beneficial for him? Below is the comparison:
| Headers | Old Tax Slab | New Tax Slab |
| Total Income | 1,500,000 | 1,500,000 |
| Total Exemption | 300,000 | 0 |
| Net Taxable Income | 1,200,000 | 1,500,000 |
| Income Tax | 172,500 | 187,500 |
| Cess @ 4% | 6,900 | 7,500 |
| Total Tax with Cess | 179,400 | 195,000 |
As you can see he is good with the older tax regime.
Salary Income: 10 Lakhs
Assuming a salaried person has total income of Rs 10 Lakhs and claim tax exemption of Rs 2 lakhs as follows:
- Standard Deduction – Rs 50,000
- 80C – Rs 1,50,000
What would be beneficial for him? Below is the comparison:
| Headers | Old Tax Slab | New Tax Slab |
| Total Income | 1,000,000 | 1,000,000 |
| Total Exemption | 200,000 | 0 |
| Net Taxable Income | 800,000 | 1,000,000 |
| Income Tax | 52,500 | 75,000 |
| Cess @ 4% | 2,100 | 3,000 |
| Total Tax with Cess | 54,00 | 78,000 |
As you can see he is good with the older tax regime.
Is New Tax Slab any good?
I think the option of new tax slabs just complicates taxation and now you must do additional calculations – one with tax deductions and other without it. In most cases you would be better off with the existing tax slabs. All in all the new tax slab is just a jumla without any substance in it.
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