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Are New Income Tax Slabs a Good Idea?

IndianMoney.com Research Team | Updated On Monday, February 10,2020, 05:35 PM

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Are New Income Tax Slabs a Good Idea?

 

 

Many people were expecting the Income Tax Slabs to be reduced. Many middle-class people were expecting tax deduction and tax exemptions to be raised. The Finance Minister Nirmala Sitharaman surprised everyone with a new tax regime.

Take a Look at New Tax Rates

Income Tax Slabs

Old Tax Rates

New Tax Rates

Up to Rs 2.5 Lakhs

0

0

Rs 2.5 Lakhs to Rs 5 Lakhs

5*

5

Rs 5 Lakhs to Rs 7.5 Lakhs

20

10

Rs 7.5 Lakhs to Rs 10 Lakhs

20

15

Rs 10 Lakhs to Rs 12.5 Lakhs

30

20

Rs 12.5 Lakhs to Rs 15 Lakhs

30

25

Rs 15 Lakhs and above

30

30

The Union Budget 2020 has retained the full tax exemption for people earning up to Rs 5 Lakhs under Section 87A. The tax surcharge rates for people who earn income above Rs 50 Lakhs have been retained.

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Are New Income Tax Slabs a Good Idea?

Tax Deductions and Tax Exemptions Not Allowed Under New Tax Regime:

  • No standard deduction of Rs 50,000 a year.
  • No House Rent Allowance
  • No Section 80C deduction
  • No Chapter V1A deduction. (This is Section 80C to Section 80U).
  • No NPS under Section 80CCD(1B)
  • No home loan interest benefits. (This is Section 24 and Section 80EEA)
  • No savings bank interest of Rs 10,000 under Section 80TTA. (This is interest income of Rs 50,000 a year for senior citizens under Section 80TTB).

See Also: Will New Tax Slabs Help Senior Citizens?

You Enjoy These Tax Exemptions and Deductions with New Tax Regime:

  • Standard Deduction on Rent
  • Agricultural Income
  • Income from life insurance
  • VRS proceeds
  • Retrenchment Compensation
  • Leave encashment on retirement.

New Tax Regime vs Old Tax Regime:

Let’s say you earn Rs 8.2 Lakhs. Which tax regime is better?

Common tax deductions claimed:

  • Section 80C up to Rs 1.5 Lakhs a year.
  • Standard Deduction of Rs 50,000 a year.
  • Section 80D on health insurance premium of Rs 20,000 a year.

See Also: Calculate Income Tax Slabs With New Rules

Your total tax deductions work out to Rs 2.2 Lakhs.

Income Tax under old regime: Rs 33,800.

Income Tax under new regimeRs 49,920.

The old regime is definitely cheaper than the new regime with this income.

Nirmala Sitharaman has said that you can save Rs 78,000 in taxes with the new tax regime, if you are earning Rs 15 Lakhs a year. This doesn’t take into account, all tax deductions and tax exemptions like HRA, Section 80C, Section 24 for home loan interest and other tax deductions. If these are accounted for, you save a lot more in the old tax regime.

Is New Tax Regime Good?

As there are no tax deductions and tax exemptions under the new tax regime, there is no incentive to save. Many people avail Endowment Life Insurance Plans, PPF, NSC and so on, just to save tax under Section 80C.

NPS was a great investment, but investors flocked to them only after NPS got the Section 80CCD(1B) benefit up to Rs 50,000 a year.

Doing away with tax saving benefits means there’s incentive to save. So, many people especially youngsters will not save and invest for the future.

Many tax experts feel that the new tax regime has its benefits. Many tax payers avail financial instruments at the last minute, just to save tax. They are fooled by agents and buy the wrong financial instruments which don’t match financial goals. In common language, this is called mis-selling. People will avail only those financial instruments which match financial goals.

See Also: How Is Your Income Tax Calculated?

The main purpose of life insurance is risk protection. This makes term life insurance a must. Sadly, many people avail life insurance like ULIPs and Endowment Plans just to save taxes. These plans have low mortality cover.

Should I Opt for Old or New Tax Regime?

You have the option to pick your tax structure. You make the choice depending on tax structure. If you avail a lot of tax deductions stick to the old tax regime. Take a look at this information and make a decision on old tax regime vs new tax regime.

If you are claiming more than these tax deductions, stay put in the old tax regime. 

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