Finance Minister Nirmala Sitharaman at the Union Budget 2020 introduced a new tax regime that allows individuals to avail lower tax rates if they were to opt-out of tax exemptions and deductions for the given financial year. Taxpayers will also be given the option to switch between the old and new tax regime.
However, according to the Finance Bill 2020, those with business income will not be able to change their tax regimes as often. It means that individuals with only salaried income and pensioners will be able to switch back and forth between the old and new tax regimes every year.
It will also affect salaried individuals who make earnings from freelancing activities as this income is treated as business income for tax purposes.
"If individuals having business income have opted for new income tax regime, then they will continue to pay their income tax liability as per the new regime in the future financial years as well," said Aarti Raote, Partner at Deloitte India to Economic Times.
But there's a way out.
Those with business income have a one-in-a-lifetime option to switch. So if they switch to the new tax regime and for various reasons find the old regime more suited to their needs, they can move back to the old regime. However, once the switch to the old regime is made, the individual cannot opt for the new tax regime again.
Additionally, if for some reason the individual's business income source ceases to exist in the future, they will have the right to choose between the old and new tax regime every financial year, as they would become a non-business income assessee.
New optional 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%|
Under the new tax regime, individuals will have to forego popular deductions like:
- Standard deduction of Rs 50,000
- Meal coupons
- Section 80C- contributions towards EPF, NPS, life insurance premiums, ELSS, PPF,
- Section 80CCD- NPS contribution upto Rs 50,000
- Section 80D- contributions towards medical insurance premium
- Section 80DD- medical expenses of specially-abled dependents
- Section 80DDB- medical expenditure on certain specified illnesses
- Section 10- house rent allowance, travel allowance
- Section 24- interest paid on home loan
- Section 16- entertainment allowance, professional tax
- Section 80E-interest paid on education loan
- Section 80G-donations
The final call on choosing the right one depends on the individual's salary structure and commitments towards debt/insurance.