Two sides of the New Income Tax system

 

The admirable words of L.H.Anderson, an American writer, “Be careful what you wish for, there’s always a catch” properly apply to the taxpayers of India. Keeping the demand of taxpayers in mind, the finance minister of India announced a new tax system with superfluity of tax slabs while presenting the Budget 2020. The new system is applicable from the financial year 2020-2021 onwards. The finance minister also gave taxpayers a choice between the new regime and existing one, leaving it to them to decide which they would like to select for. This has fabricated numerous confusions and chaos in the minds of taxpayers. All these factors made the tax laws more complex than unsophisticated. As the provisions of determination of tax liability and Tax Deducted at Source (TDS) would be different in the existing and new income tax system, depending on gross income and amount of tax-saving investments or deductions, selecting the right regime is very vital to avoid the excessive tax outlay. Incapable to reach out to the tax specialists for help due to the lockdown to restrain the spread of the extremely infectious novel Coronavirus, taxpayers are clueless on whether to select the old or new income tax system. The new scheme has seven slabs compared to four slabs in the old scheme. Taxpayers need not to pay tax on income up to 2.5 lakh rupees. They have to shell out 5 per cent on income above 2.5 lakh rupees to 5 lakh rupees, 10 per cent on income above 5 lakh rupees to 7.5 lakh rupees, 15 per cent on income above 7.5 lakh rupees to 10 lakh rupees, 20 per cent on income above 10 lakh rupees to 12.5 lakh rupees, 25 per cent on income above 12.5 lakh rupees to 15 lakh rupees and 30 per cent on income above 15 lakh rupees. As per the old regime taxpayers need not to pay tax on income up to 2.5 lakh rupees.  They have to shell out 5 per cent on income above 2.5 lakh rupees to 5 lakh rupees, 20 per cent on income above 5 lakh rupees to 10 lakh rupees and 30 per cent on income over 10 lakh rupees. Tax slab rates of new tax system are not distinguished based on age group unlike the old system where the basic income threshold exempt from tax for senior citizen (aged 60 to 80 years) and super senior citizens (aged above 80 years) is 3 lakh rupees and 5 lakh rupees respectively. Individuals not having business income can select between old or new system each year. So, they may exercise more useful option after vigilantly evaluating each financial year. Individuals having business income can exercise the option only once and that shall be conclusive. Individuals having salary have to choose between old and new schemes at the time of making their tax declaration to employer for the purpose of deducting tax at source.

 

Mixed Bag

The new system offers concessional tax rates compared to the existing regime. Maintenance of plethora of documents is not required as most of the exemptions and deductions are not available to the taxpayers. The new system treats all taxpayers equally and benefit of deduction or allowances would not be available. This is beneficial to the taxpayers who do not want to invest in options which have lock-in period criteria and want to invest in open-ended mutual funds or instruments or deposits, which delivers them handsome returns along with flexibility of withdrawal. The reduced tax rates of the new system would provide more disposable income to the taxpayer. In addition, taxpayers can customize their investment decisions under the new system.

 

The existing system restricts the investment choices for the taxpayer as he or she has to make the investments only in the instruments specified.

However, the major exemptions and deductions would not be available under the new tax system are plenty and they are Leave Travel concession or assistance, House rent allowance, allowances or benefits specifically granted to meet expenses incurred in performance of duties of office or employment, allowances or benefits granted to meet personal expenses in performance of duties of office or employment or to compensate for increased cost of living, Standard Deduction, Entertainment allowance, Professional tax, Interest on Home Loan on self-occupied properties, Deduction on family pension, Daily Allowance to MPs and MLAs, exemption of minor’s income up to 1,500 rupees per child, Life insurance premium, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, tution fee of children, home loan principal repayment, Contribution to certain Pension Funds, Contribution to pension scheme of Central Government, Voluntary contribution to pension scheme of Central Government, Investment made under an equity savings scheme, Health insurance premium, Maintenance including medical treatment of a dependent who is a person with disability, Medical treatment of specified diseases, Interest on loan taken for higher education, Interest on loan taken for residential house property, Donations to certain funds, charitable institutions, Rents paid, Donations for scientific research or rural development, Contributions given by any person to Political parties, Interest on deposits in savings account, Interest on deposits in case of senior citizens and Deduction in case of a person with disability.

Which is the right choice?

Unluckily, there is no single answer to the above query. And the biggest culprit again is the convolution and complexity of the Indian tax structure. Apparently, the reduced tax rates of the new scheme should result in lower taxes. But the removal of exemptions and deductions has proven that the advantage of lower tax rates is insignificant and worthless. People invested in various instruments to claim tax reliefs will not find the new regime gorgeous. Old scheme is advantageous for the taxpayers claiming total deductions or exemptions above 2.5 lakh rupees. In case of annual income more than 15 lakh rupees and 2.5 lakh rupees annual tax-saving investments or deductions, the new scheme won’t have any advantage over the existing system. Therefore, if substantial amount of tax breaks were being availed by the taxpayers, it would be safer to be part of old scheme. Taxpayers eyeing to satisfy various financial compulsions, such as wealth creation through investments in tax-saving instruments, paying premiums to take care of insurance needs, paying children’s tuition fees, paying equated monthly installments of an education loan, buying a house with a home loan etc. the older regime still works in their interest. Taxpayers having no home loan, staying in rent-free accommodation and desiring to make small or no investments may find the new scheme advantageous.

As a final point, all the changes introduced do not categorically make things calmer and cooler for Indian taxpayers. Although finance minister of India mentioned that the new tax system will boost consumer demand, it could come at a heavy cost in the form of poorer household savings. The discretionary tax structure endangers a prominent concept that goaded taxpayers of India to save money for the future. Moreover, taxpayers have to do a comparative assessment of both schemes, before framing the final decision. Since the system is new and has many tricky provisions, taxpayers have to consult a proficient tax expert who can recommend the ideal route.

 Mind Map

NEW TAX REGIME

 · Has seven slabs of tax rates

· Optional and applicable from the financial year 2020-2021 onwards

· Tax slab rates of new tax system are not distinguished based on age group.

· Maintenance of plethora of documents is not required as most of the exemptions and deductions are not available to the taxpayers.

· Taxpayers can customize their investment decisions due to high disposable income in hand.

· Major exemptions and deductions (approximately seventy) would not be available.

· Suitable for taxpayers having no home loan, staying in rent-free accommodation and desiring to make small or no investments.

 

 OLD TAX REGIME

 

· Has four slabs of tax rates

· Mandatory

· Three different basic exemption limits has been prescribed for different age groups.

· Taxpayers have to maintain many documentary evidences to support their investments and claims to avoid the tax disbursement.

· Taxpayers have to make the investments only in the instruments specified.

·  Taxpayers can avail all exemptions and deductions.

· Suitable for taxpayers who were being availed substantial amount of tax breaks and eyeing to satisfy various financial compulsions through insurance and borrowings.

 

-Shivanand Pandit

Goa