For the financial year 2020-21 (the assessment year 2021-22), the government proposed a new and simplified income tax regime that will give individuals higher relief if they let go of certain deductions.
"In order to provide significant relief to the individual taxpayers and to simplify the Income-tax law, I propose to bring a new and simplified personal income tax regime wherein income tax rates will be significantly reduced for the individual taxpayers who forgo certain deductions and exemptions," said Finance Minister Nirmala Sitharaman at the Budget 2020 presentation.
The changes in tax rates for FY 2020-21 include:
|Taxable Income Slab (Rs)||Existing Tax Rates||New Optional Tax Rates For FY 2020-21|
|Above 15 Lakh||30%||30%|
The new regime is optional. In fact, taxpayers can switch back and forth between the existing income tax regime and the new one. Business owners will not have this option.
If you wish to opt for the new tax regime, these are the popular deductions that you will have to let go:
- Standard deduction of Rs 50,000
- Most commonly claimed deductions under section 80C, including contributions towards EPF (Employees Provident Fund), insurance premium, NPS and ELSS. However, note that deductions under sub-section (2) of section 80CCD (employer contribution on account of the employee in notified pension scheme like NPS) and section 80JJAA (for new employment) can still be claimed.
- Tax benefits on interest paid on housing loan under section 24, 80EE and 80EEA.
- House rent allowance exemption or deduction under section 80GG, if you live in rented accommodations.
- Leave travel allowance exemption that is available for two journeys performed in a block of 4 calendar years.
- Deductions on interest earned on deposits in savings account under section 80TTA/80TTB.
- Deductions on entertainment allowance for government employees or professional tax under section 16.
- Deductions under sections 80D on medical insurance premium paid.
- Exemptions under section 80DD and 80DDB on medical expenses of specially-abled dependents and on certain specified illnesses.
- Deduction on interest paid on education loan under section 80E.
- Deduction on donations made to charitable institutions under section 80G.
- Deduction on interest paid on loan for the purchase of electric vehicle under section 80EEB.
- Tax benefits on donations to political parties under section 80GGC.
- Deductions for donations made towards scientific research or rural development under section 80GGA.
- Deduction of Rs 15,000 towards payments made for family pension under clause (iia) of section 57.
Apart from the above mentioned deductions, other deductions under chapter VIA like 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc are not eligible for claims for those opting for the new tax regime.
Plans to simplify tax filing
FM Sitharaman also said that the government plans on gradually phasing out deductions and exemptions to make the tax structure simpler and easier to comply with.
There are also plans to provide pre-filled income tax returns forms for easing the process of filing returns, in line with its push toward seamless service and ease of compliance.