Income Tax Slabs for 2020-21 and their Impact

7 MinsFebruary 19, 2020

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While the Union Budget 2020 spoke of reforms to finance, agriculture, irrigation, water, sanitation, healthcare, education, infrastructure, and digital connectivity among others, its most popularly discussed feature was the announced changes to the tax regime.

Proposed as an option for taxpayers to the existing tax slab structure, the Budget 2020 has given rise to various perspectives and speculations regarding its long-term impact on the economy. Read on as we discuss these changes in detail:

What are the new Income Tax Slabs in India?

Budget 2020 has proposed two additional slabs in the tax structure. The old tax rates were subject to change as one’s taxable income under the ranges of Rs 2.5 – 5 lakh, Rs 5 lakh to 10 lakh, and above Rs 10 lakh (taxed at rates of 5%, 20%, and 30% respectively). In comparison, the new tax slabs proposed in the Budget provide for 7 slabs in increments of Rs 2.5 lakh. The tax rates for these too, increase by 5% for each slab.

Table 1: Income Tax Slabs & Rates for Individuals under 60 years of Age

Similarly, these revised slabs are also applicable for individuals falling under the age brackets of 60-80 years and above 80 years.

Table 2: Income Tax Slabs & Rates for Individuals between the age of 60 & 80 years

Table 3: Income Tax Slabs & Rates for Individuals above the age of 80 years

The new tax structure does provide some breathing room on account of the reduced tax rates. However if you opt for it, you will have to forgo all the common income tax deductions. Exemptions (such as deductions under section 80C, 80D) available for taxpayers via investments except for employer’s contribution to national pension scheme (NPS) (80CCD (2)) have also been reduced.

[Also Read: New Tax Regime Vs Old Tax Regime]

Additional tax exemption claims that you would forgo in opting for the new tax structure include:

• Leave travel allowance (LTA) as per clause (5) of Section 10;
• House rent allowance (HRA) as per clause (13A) of Section 10;
• Daily Allowances as per clause (14) of Section 10;
• Standard deduction of Rs 50,000 under Section 16;
• Employment/professional tax deduction per Section 16;
• Interest under section 24 with respect to self-occupied or vacant property referred to in sub-section (2) of Section 23. (Loss under the main income from house/property for rented houses shall not be eligible to be set off under any other head and would be allowed to be carried forward as per extant law);
• Any deduction as per chapter VI-A ; [except 80CCD(2) - NPS Contribution by the employer]

Impact of the New Tax Structure

While it may seem that the new tax structure is not attractive given that the list of exemptions is no longer applicable, it is not entirely so.

For individuals earning up to Rs. 7.5 lakh per annum, the revised tax structure bodes well, given that there is a 10% decrease in the tax charged, above the Rs 5 lakh bracket. However, those of you in the higher income bracket may be better off availing the tax exemptions under the old tax structure. But remember that the mere availability of tax exemptions does not guarantee one being able to use it. It is equally dependant on one’s ability and willingness to invest across all tax-saving avenues.

Let us understand the impact of the new tax rates in detail:

You avail of all tax exemptions and investments:

If you are an avid investor and make the most of your tax exemptions under section 80C (via Instruments such as PPF, ELSS, Tax-Saver FDs, home loan principal repayment), 80 D (Health Insurance), and 80 CCD (NPS) in addition to availing standard deduction, and exemptions under HRA, LTA and Daily Allowances, the old tax structure is more beneficial to you.

In other words, if you utilise the entire exemption limits - Rs 1.5 lakh under Section 80C, Rs 75,000 under Section 80D and Rs 50,000 under Section CCD then you will be able to save on tax by staying under the old tax regime.

You are not an avid investor:

However, if you are not an avid investor, and do not tend to utilise all your tax-saving options, then the new tax regime with an up-front reduction in tax rates will help you reduce your liable tax amount.

Therefore, keep these points and your financial behaviour in mind when considering whether to stay with the old tax regime or switch to the new tax regime. Besides, if you are a salaried individual, you have the option to change between the new income tax regime and the old regime every year.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.