At the Union Budget presentation, Finance Minister introduced a new tax regime to simplify the tax filing process so that one could comply with the Income Tax law "without taking help from professionals."
She said that "currently the Income Tax Act is riddled with various exemptions and deductions which make compliance by the taxpayer and administration of the Income Tax Act by the tax authorities a 33 burdensome process."
The new tax regime has lower income tax rates for some income slabs and can be availed by those who are willing to forgo certain deductions and exemptions.
New income tax rates for 2020-21:
|Taxable Income Slab (Rs)||Existing Tax Rates||New Optional Tax Rates For FY 2020-21|
|Above 15 Lakh||30%||30%|
Which tax regime is better?
The view on which tax regime is better is subjective as it depends on an individuals debt obligations, investments and salary structure. This will mean that to make a choice, you will have to seek help from a professional to make calculations on which one will help you save more tax outgo.
As that would defeat the government's intention behind introducing the simplified regime, the Central Board of Direct Taxes (CBDT) has introduced its own tax calculator for the financial year 2020-21 that will help one make a choice on their own.
The Income Tax department wants you to visit their website and ascertain the tax impact with the calculator, which mind you, is only meant to give you a basic idea of the estimated impact. By making this comparison, you can plan your investments, savings and expenses for the FY 2020-21 before 1 April.
How to use the Income Tax calculator to compare the old and new tax regime?
- You can directly visit the IT department's tax calculator via this link https://www.incometaxindiaefiling.gov.in/Tax_Calculator/index.html?lang=eng
- If the link above does not work, visit the IT department's official website and find "Tax Calculator FY 2020-21" under "Quick Links" (on the left-hand side).
- On the page, choose your age group.
- Enter estimated figures for annual income and exemptions/deductions availed.
For example, if your estimated annual income for FY21 is Rs 7 lakh and will avail deductions of up to Rs 1.5 lakh, your tax liability under the old regime will be Rs 23, 400 and Rs 33,800 under the new regime. Which means that the old regime will help you save Rs 10,400 in tax outgo.
However, if you do need any deductions or exemptions, your tax liability under the existing regime will be Rs 54,600, making the new regime more profitable with a tax benefit of Rs 20,800.
Note: The tax calculator is only available to calculate the tax liability of ordinary residents. All tax calculations include cess but are exclude surcharge and total eligible exemptions/deductions are assumed to be zero in the new regime.
The choice between the two regimes boils down to an individual's salary structure and commitments towards debt/insurance.
Ideally, start your tax and investment planning at the beginning of the financial year (1 April 2020) to make timely declarations on investment and decide what tax regime you would want to opt for.
You can also make a switch between the tax regimes every year, based on your situation.
About the author
Olga Robert has been covering equity markets and personal finance for over two years.