Union Budget 2020 offers individuals the choice of paying tax under the new regime of lower income tax rates by forgoing the tax exemptions/deductions or continue to pay tax under the existing income tax laws by claiming the applicable exemptions and deductions. Essentially, the more exemptions an individual claims, the less likely he/she is to benefit from the new optional tax regime however which regime is beneficial will vary on a case to case basis. Calculations show that salaried individual.
An individual with gross salary up to Rs 12.5 lakh claiming only deductions under section 80C (Rs 1.5 lakh), 80D (Rs 25,000) and standard deduction of Rs 50,000 will pay more tax under the new personal income tax regime. Lower the gross salary, higher the additional tax payable by individuals in the new tax regime claiming only these three exemptions (up to the amounts mentioned) in the old tax regime. Individuals claiming little as tax breaks are more likely to gain from the new regime.
The tables below show the amount of tax saved or extra tax payable for a salaried individual at different salary levels under the existing tax regime and the new proposed tax regime.
If the salaried individual is claiming deductions under section 80C, 80D (medical premium), HRA exemption, LTA exemption and deduction of interest paid on housing loan taken for self occupied property up to permissible limits, he is is likely to be better off in the existing personal tax regime.
Case II— Salaried individual claiming most common deduction/exemptions, i.e. under sections 80C, 80D and standard deduction
Assuming the individual is claiming these tax breaks: standard deduction of Rs 50,000, deduction of Rs 1.5 lakh under section 80C and Rs 25,000 under section 80D for medical premium. In this case if the individual opts for the new personal tax regime then at gross salary of Rs 7.5 lakh the person will have to pay Rs 20,800 extra tax, at a gross salary.
Therefore, a high earner claiming only these deductions is likely to save tax under the new regime but lower income earners up to gross salary of Rs 12.5 lakh will end up paying more tax.
Case III— Salaried individual
claiming more exemptions/deduction, i.e. under sections 80C, 80D, standard
deduction and HRA exemption
Assuming the individual is claiming these tax breaks: standard deduction of Rs 50,000, deduction of Rs 1.5 lakh under section 80C and Rs 25,000 under section 80D for medical premium and HRA exemption (varied as per salary income level). In this case if the individual opts for the new personal tax regime then at gross salary of Rs 7.5 lakh