Decoding Budget 2020: Is the new tax regime better for your investment savings?: 28-02-2020

From the point of view of personal income tax, the Budget 2020 may very well be called a turning point for individual tax payers in the country. Taking cues from the Direct Taxes Code envisaged way back in 2009, the government has paved way for a simplified tax regime. By simplification, it means, in the New Tax Regime there will be lower tax rates but no income tax exemptions and deductions available for reducing tax liability. So, you earn income and pay tax based on the income tax slab, with no exemptions and deductions available to avail.

What’s new – The new income tax slabs

As per the new tax regime, the new income tax slabs for FY 2021-22 will have more number of income slabs. Presently, the tax rates are 5, 20 and 30 per cent. So, for someone whose income increases from the lowest slab where he or she is paying 5 per cent, the applicable tax rate is 20 per cent.

Decoding Budget 2020: Is the new tax regime better for your investment savings?

The new tax regime is more progressive as tax rates are increased in a narrow range, thus keeping the impact of tax low. And, importantly, income above Rs 15 lakh will be taxed at 30 per cent compared to income above Rs 10 lakh currently taxed at 30 per cent.

Exemptions, deductions to be removed

Under the new tax regime, the taxpayer will not be allowed to take the benefit of various exemptions and deductions available under the Income Tax Act, 1961. Some of the major and popular deductions that taxpayers used to avail were Section 80C (PPF, NSC, ELSS etc) , Section 80D (Health insurance) and Section 24C (Home loan principal repayment).

Simply put, premium paid on life insurance, contribution to PPF, EPF etc will no longer fetch you tax benefit. Further, the Standard Deduction, leave travel allowance and all other allowances will also not be available in the new tax regime.

Impact: So far with a plethora of tax-saving investments such as life insurance, PPF, NSC, unit-linked insurance plans (Ulips), equity linked savings scheme (ELSS) etc available, the taxpayer was spoilt for choices. On top of it, other Section 80C tax benefits include principal repayment on home loan, involuntary contribution towards EPF, tuition fees etc. Even premium paid towards health insurance carries tax benefit under Section 80D.

So, the pertinent questions that arises is – What is the incentive to save? By investing in life insurance policies, PPF, ELSS etc., one was not only able to save taxes, but also achieve long-term financial goals.

How to decide

As of now, for FY 2020-21 and future financial years, the New Tax Regime is going to be an option available along with the old or existing Tax Regime, until the government completely moves on to the new regime by junking the existing tax structure.

The question that pops up is, whether the new regime without any exemptions is better than the old or the existing tax regime?

Whether the new or the old tax regime is beneficial does not have a one-size-fit-all answer.

As a taxpayer, you need to figure out which one suits you. The choice will depend largely on your age, your long-term goals, your investible surplus, your annual income, among other things.

But, if you wish to compare the old and new tax regime purely on tax liability, here’s a step-wise process to do that.

Step 1: Estimate your total taxable income.
Step 2: Find out the total amount of exemptions, deductions that you will generally be availing.
Step 3: Now, calculate tax liability under old tax regime taking exemptions, deductions into account
Step 4: And then, find out the tax liability under the new tax regime.
Step 5: Lastly, using trail-error method check for what amount of deductions, the tax liability under the old and new regime are the same.

Below are a few examples for different income slabs.

Decoding Budget 2020: Is the new tax regime better for your investment savings?

Conclusion:

Tax benefit available on savings instruments such as PPF, life insurance, mutual funds etc was always incidental. It is always better to link your savings to your financial goals, no matter there is a tax benefit available or not.

In the new tax regime, the role of planning your finances keeping an eye on your goals becomes all the more important. One, you will be able to better estimate your tax liability for the entire FY and Secondly, you will not be required to lock-in funds.

Therefore, directing your liquid and investible funds towards long-term savings will become crucial to achieve long-term goals even in the absence of income tax Exemptions and Deductions. Having a proper savings plan in place helps, but not without a safety net. There could be an untimely death of the bread earner in the family. To make sure your family members do not dip into the savings earmarked for long-term goals, ensure you have adequate life insurance coverage. And, what fits the bill is a term insurance plan – a high cover, low-cost protection tool.

Source : Financial Express

error: Content is protected !!