The Indian Finance Minister, Nirmala Sitharaman, presented the Union Budget 2020 of February 1st, 2020. In this Budget 2020, a new income tax slab system was introduced while many exemptions and deductions were removed. In this article, we decode the Union Budget 2020. With the aim of making it easier for the layman to understand what difference the new tax rates will actually make.
Old tax rates Vs New tax rates
The below image showcases the existing and new income tax slabs. The government now gives the citizen to choose between the two tax slab rates for calculating his tax. As seen, below the existing tax rates are higher but they also present the option of deductions and exemptions. Which ultimately reduces the final tax payment. On the other hand, the new tax rates seem lower but do not provide many deductions and exemptions opportunity.
What is Net Taxable Income?
Your Gross Total Income is your total earnings by adding all your heads of income. This thus includes income from salary, business, property, other sources and capital gain earnings in a financial year. The gross total income can further be divided into Exempted Income and Taxable Income. There are certain types of income sources on which you can get an exemption from tax payment. Hence, these sources of income are not added in the income tax calculation process. Thus, Exempted Income refers to some sources of expenditure, income or investment on which no tax payment is levied, thus reducing the overall taxable income.
Net taxable income is the total amount of income which is used to calculate the tax a person has to pay in a given year. Taxable income includes salary, bonus, wage, tips, investment income as well as other unearned income. It is also known as Gross Income. All of this was valid for the older tax rates. Find more details on this in Income Tax Calculation, Slab Rates & Important Details For Beginners.
However, in the new tax rate system, this entire box of Gross Total Income will be taken into account for your tax calculation. There will not be any exempted income or deductions. There are some 70+ deductions and exemptions which one cannot claim as per the new tax rates. Some of the important ones are given below. Although, the exemption on the National Pension Scheme, is still valid, up to Rs 50,000.
New Tax Calculation
With the help of an excel, we show you how to calculate your tax according to both the old and new tax rates. Access the excel sheet here. The following comparisons should help you understand how different deductions/exemptions will play to your final tax calculation.
Case 1: Income Rs 50,000/month
Suppose, a person has an income of Rs 6 lakh. If he claims no deductions/exemptions, then as per the old tax rates, his tax payment comes to Rs 32,500. As per the new tax rate, the tax payment comes to Rs 22,500. Thus, we see a difference of Rs 10,000.
Now, if the person claims a deduction of Rs 50,000, then his tax payments are the same in both the old and new tax rates.
Moreover, if the person claims Rs 1.5 lakh worth of deduction, then his tax payment is nil as per the old tax rates. But he has to pay Rs 22,500 as per the new tax rates.
Case 2: Income Rs 60,000/month
In this case, we suppose the person is taking 80C and standard deductions, amounting to Rs 2 lakh in total. Hence, the old tax calculation is Rs 16,500 while the new tax calculation is Rs 34,500. Thus, a massive difference of Rs 18,000.
Case 3: Income Rs 80,000/month
Here, the total yearly income is Rs 9.6 lakh. When we take the 80C and standard deductions into account, the total tax calculation comes to Rs 64,500 in the old tax regime. While the new tax rate calculation is Rs 69,000. Therefore, a difference of Rs 4,500.
Case 4: Income Rs 1 lakh/month
The total yearly income is Rs 12 lakh. If we only consider the 80C and standard deductions, then there is a slight difference in the tax calculations.
However, if we take Rs 24 lakh as HRA into account then as per the exemptions, the old tax payment is Rs 64,500. While the new regime tax payment is Rs 1.15 lakh. Hence, a massive difference of Rs 50,500.
In case you have a business income, then you only get one chance to switch from the previous tax rates to the new one. You cannot switch back to the old tax rates thereafter. Thus, it is important to weigh all your options carefully before making any changes. It is also not common for any country to have two tax regimes. Generally, the older tax rates are fazed out before the new one is implemented. So there might be a chance of everyone being forced to switch to the new tax rates sometime in the future. Watch our video below for further explanation.
Budget 2020 Highlights
Tax applicable on PF
According to the new budget, if the employer’s contribution to PF is below Rs 7.5 lakh per year then it is taxable. Earlier this amount was unlimited due to which some employers raised a concern. Hence, a cap was introduced.
Deposit insurance cover
The Deposit Insurance and Credit Guarantee Corporation (DISGC) have been permitted to increase the deposit insurance coverage amount to Rs 5 lakh per depositor. Earlier, this limit was Rs 1 lakh.
Affordable housing loans
If one takes a loan under Section 80 EEA of the affordable housing loan then you get an interest exemption of up to Rs 3.5 lakh. This is valid till 31st March 2021.
The top 100 ranking education institutes of the country will start offering online degree courses. Furthermore, there will be a common eligibility test for non-gazetted posts for all government exams.
Pre-filled details of donations
To help with the process of claiming deductions for donations, it is proposed to pre-fill the donee’s information in taxpayer’s return on the basis of information of donations furnished by the donee. This is similar to how one’s TDS payments are recorded for future reference.
NRIs who visit India for a minimum of 120 days need to pay taxes. If the person is residing is multiple countries for a short period of time, to save from paying taxes then also he needs to pay tax in India.
Tax audit slab
The tax audit slab has been increased from Rs 1 crore to Rs 5 crore. This will help lower the burden of compliance on small businesses. But it is important here to have 95% of all your transactions via banking services. Only less than 5% of your transactions can be via cash. Otherwise, you will need to undergo an audit.
Defer ESOP taxation
Employees of startup firms now have the option to pay their taxes not at the time of allotment of securities but at the time of exiting the company or selling the shares or for a period of 5 years, whichever is earlier.
Startup income tax exemption
Eligible startups with a turnover of up to Rs 100 crore have permission to deduct 100% of their profits for 3 continuous assessment years out of 10 years.
Vivad se vishwas scheme
Under this scheme, a taxpayer would be required to pay only the amount of the disputed taxes and he will get a complete waiver of interest penalty provided that he pays it by 31st March 2020. Meanwhile, others who avail this scheme after 31st March 2020 will have to pay some extra amount too. This scheme is open to the public until 30th June 2020.
The credit guarantee trust will take guarantees for loans given to MSMEs. A separate trust fund called Credit Guarantee Trust for Medium and Small Entrepreneurs will be set up to help MSMEs get loans.
Tax rate for technical services has been reduced to 2%. But professional services are not a part of this.
For people doing business via e-commerce websites, no TDS deduction will occur for earnings up to Rs 5 lakh. Earnings above Rs 5 lakh will incur TDS deduction.
Watch the video for details on these updates below.
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