Budget 2020 – New Income Tax Rates to benfit Salaried Class in higher Tax Bracket

An analysis on which set of income tax rate will be beneficial for Salaried Employees

Two Sets of Income Tax Slabs introduced in the Budget 2020 – A Taxpayer has the option of choosing either new Income Tax Slab with minimum exemption or Old Tax slab with all applicable conditional income tax exemptions

Looks like an initial step to get rid of multiple income tax exemptions in the long run, Finance Minister has announced a new Income Tax Regime (which is presently optional) with a reduced Income Tax Rate Structure with very minimal Tax Exemptions.

Two sets of Income Tax Rates 2020-21

Income Slab New Tax Rates if no exemption availed Income Tax Rates of exemptions availed
Up to Rs 2.5 lacs No tax No Tax
Rs. 2.5 to 5 lacs 5% 5%
Rs. 5 lakh to 7.5 lakh 10% 20%
Rs. 7.5 lakh to 10 lakh 15% 20%
Rs. 10 lakh to 12.5 lakh 20% 30%
Rs. 12.5 lakh to 15 lakh 25% 30%
Above 15 lakh 30% 30%
Note 1: In addition to Income Tax, Health and Education cess at 4% of Income Tax is payable
Note 2: An Individual having Taxable Income less than Rs. 5 lakh need not pay any Income Tax in existing and also in the new income tax regime as Income Tax Rebate up to Rs. 12,500 /- Section 87 A is applicable for the financial year 2020-21

Some of the Income Tax Exemptions which are not available if Income Tax Rates under New Tax Regime is opted:

  • Standard Deduction under Section 17(2) of Income Tax Act
  • All Section 80 C Deductions which is allowed up to Rs. 1.5 lakh for savings under GPF, NPS subscription by employee, ELSS, PPF, Insurance Premium etc
  • Additional Exempiton of Rs. 50,000 for NPS contribution under Section 80 CCD(1B)
  • Medical Insurance Premium Exempted under Section 80D
  • Exemption under Section 80 DD – Medical Expenses of specially abled dependents
  • Exemption under Section 80DDB – Medical Expenses in respect of certain illnesses.
  • Exemption allowed for House Rent Allowance under Section 10
  • Tax Exemption for LTC under Section 10
  • Income Tax Exemption under Section 24 allowed in respect of Interest paid on Housing Loan
  • Section 80 G Exemption – Donation paid to Charitable Institutions
  • Section 80 Exemption – Deduction allowed on Interest paid on Education Loan

Income Tax Exemptions applicable along with New Income Tax Rates 2020:

  • Income Tax Exemption under Section 80 CCD(2) on Employer Contribution in NPS (which is 14% of Basic Pay in the case of Central Government Employees)
  • Income Tax deduction for Bank Interest up to Rs. 10,000 under Section 80TTA

New Income Tax Rates 2020 Vs Old Income Tax Rates : Which is more beneficial ?

In order choose between two sets of Income Tax Rates, a question natually comes in the mind of an Income Taxpayer, which set of Rates more suits me and at the same time more beneficial.
As per the opinion of Majority of Tax Experts, Existing Tax Rates with applicable Tax Exemptions is more beneficial to Salaried Indiviuals since they are entitled to many Income Tax Deductions / Exemptions such as Standard Deduction of Rs. 50,000, Section 80C deductions for savings, Section 80D deduction for Medical Insurance Premium, Exemption for interest on housing loan under Section 24 etc.
However, if an individual whose taxable income is more than Rs. 13 lakh and entitled to Income Tax deduction of up Rs. 2 lakh only (Standard Deduction of Rs. 50000 plus deduction under Section 80C up to Rs. 1.5 lakh), then choosing new tax regime will be beneficial to him/her.
These taxpayers pay lesser income tax in new tax regime as they save considerable tax on account of lesser income tax rate of 20% and 25% for their income more than Rs. 10 lakh and Rs. 12.5 lakh respectively.
In the case of existing Income Tax Rates these taxpayers will have to pay 30% income tax for the income more than Rs. 10 lakh