Cracking The New Tax Regime
Budget 2020 has brought a lot of buzz, a ton of opinions, a number of proposals for the Indian economy and most importantly, a need to be patient, as we watch the various announcements being put into action.
One of the most popular announcements from Saturday is the new taxation rules which seem to bring down our taxable income - and leave more cash for the present.
"We wanted to be sure that money is in the hands of the people rather than investing in schemes. We used the same principle as we did when the corporate tax rate was slashed. We wanted to simplify the tax slab," said Nirmala Sitharaman, our Finance Minister as she delivered her second Budget on 1st February 2020.
The current and new income tax regimes will exist simultaneously, and as tax-payers, we get to choose which one we want to use. However, what was meant to be made a simpler tax regime seems to have introduced more confusion than convenience or clarity. Let’s dive deeper on where things currently stand:
Old Tax Regime:
We are all well aware of the old tax regime, and here is a quick refresher. We utilise deductions from section 80C and other sections to bring down our taxable income. These deductions include:
Section 80C: Insurance premiums, Investments in PPF, contribution to the Employee Provident Fund (EPF), NSC investments, investments in 5 year FDs and more. These investments give us a deduction of up to ₹1.5 Lakhs.
There are also deductions beyond Section 80C that we can utilise to increase deductions and to over ₹ 1.5 Lakhs:
House rent allowance (section 10)
Home loan interest paid off up to ₹ 2 Lakhs (section 24B)
A health insurance premium paid off up to ₹ 25,000 for those under 60 (section 80D)
NPS contribution of up to ₹ 50,000 (section 80CCD(1B))
Thus, we could actually take our deductions up to ₹ 2 Lakhs as per the existing tax regime.
The current tax slabs look like this:
New Tax Regime:
The new regime is meant to be a simpler calculation for an individual without the help of a CA or another professional. On face value, this tax calculation looks attractive. However, as we scratch the surface and sift through multiple calculations, the benefits seem confusing.
For now, we will hold on commenting about which regime is right for you.
Let’s understand what this new tax regime brings:
No deductions: Deductions that you otherwise claim on your taxes have zero value in this tax calculation. 70 out of 100 deductions have been disallowed. Here are some major deductions you won’t get in this regime:
Section 80C investments
House rent allowance
Housing loan interest
Leave travel allowance
Medical insurance premium
Savings bank interest
Education loan interest
Also, as opposed to the current 4 tax slabs, this regime has 7 tax slabs :
We will continue to keep you informed on the calculations and how they will work out. However, one clear disadvantage we see here is that there is no incentive to make investments. Savings are a significant part of the Indian DNA and by introducing this optionality, we are discouraging individuals to make investments that will benefit them in the future.
Over the decades, we have seen families use their PPF and ELSS investments to build long term wealth. Youngsters have been incentivized to take term insurance plans and start saving early. These money decisions that otherwise served as fuel to life goals could now see a staggering fall.
The Basis Take
We would have appreciated an impetus to investing and building stable financial futures, versus instant gratification of paying lower taxes returns. Household borrowing is at an all-time high. Indians are spending more through credit cards. Unsecured borrowing has become a rather common phenomenon.
Also, assuming one is not a diligent saver, the money that is saved by paying lower taxes could get spent in a heartbeat. While at Basis, we will continue to keep you informed on how the budget decisions will affect you, we suggest you start evaluating the option of choosing a taxation structure that is suitable for you, one that encourages you to save i.e the current tax regime or the new regime that leaves you with less amount to pay in taxes and more cash in hand.
We spoke with Chartered Accountant and Basis community member, Karuna PS, and here is what she had to say: “Only 7 out of 100 individuals pay tax in India. The government should aim to curb tax from this group rather than making changes to the slab which looks rosy but a big disappointment to many. In the long term, a taxpayer would end up paying higher taxes in the new regime. Though the new regime is optional, it would encourage taxpayers to forego deductions currently available. This would also be a threat to household savings.”