The budget presented by the Union Finance Minister Nirmala Sitharaman has proposed an alternative tax regime for individuals and Hindu Undivided Families (HUF). This has caused a lot of confusion in the minds of general public. People are confused as to whether one should remain in the old regime or should migrate to new regime of lower taxes. Let us discuss broadly the tax implications of staying in the old regime viz a viz migrating to new scheme.
What the alternative tax regime provides
The finance minister proposes to introduce an alternative tax regime by introducing a new Section 115BAC in the Income-Tax (I-T) Act, which will apply to Individuals and HUF. The new tax regime is optional for the tax payers under which tax at concessional rates shall be levied upto the income of Rs15 lakhs under seven progressive tax slabs of 5%, 10%, 15%, 20% and 25% on the income slabs advancing by Rs2.50 lakhs starting from the basic exemption of Rs 2.50 lakhs. In case one wishes to avail the benefits of reduced tax slab rates in place of existing tax slabs one has to forgo various tax deductions and exemptions.
Salaried people will not be able to avail major benefits like Standard Deduction, House Rent Allowance, Leave Travel Assistance and even some of the allowances allowed for performing duties in case they opt for the new tax regime. Moreover for salaried and self employed various deductions like under Section 80 C (comprised of various items like EPF, LIP, School Fee, PPF, NSC,ELSS, home loan repayment etc.), 80D (for health insurance premiums), 80 CCD(1) and 80 CCD(1B) (for NPS) will also not be available. The tax payer will also have to forgo the benefit of deduction under Section 24(b) in respect of interest on home loan for self occupied property as well as his right to set off loss under the house property head. For retired senior citizen they will not be able to claim standard deduction in respect of pension from ex employer as well as deduction in respect of interest from post office and banks u/s 80TTB.
It is not only that you will not be able to set off the current loss as well as brought forward loss under the head house property against current income if you opt for new scheme. Moreover a tax payer will not be able to claim carry forward, the losses under house property head. The right to carry forward the loss is also like tax credit available to you adjustable against future tax liability.
The cumulative benefit for moving to a new tax scheme is around Rs75,000 if your total income is Rs15 lakhs. As many exemptions and deduction can be claimed and the composition of these tax benefits can vary from a person to another, a readymade statement can't be prepared showing as to which regime is beneficial. However, looking at the tax benefits which majority of the taxpayer will have to forgo, the benefits available with existing regime will outweigh the benefits of migrating to new regime.
How the scheme will work
Let us understand the tax implications with an example. Since almost all the salaries will either have benefit of HRA for rent paid or they may in all probability would have bought a house with home loan. Presuming he has bought a house with home loan, he has to forgo home loan benefits for interest as well as principal of Rs3.50 lakhs together. After taking into account the fact that he also will have to forgo the claim of standard deduction of Rs50,000 if he wishes to migrate to the new regime making the total benefit he will have to forgo to Rs 4,00,000 resulting in tax impact of Rs80,000 if he is in 20 per cent tax slab having income between Rs5 lakhs to Rs10 lakhs. The net tax benefit forgone is higher than the benefit of Rs 62,500 accruing to him by opting under new scheme. For those who are in 30 per cent tax slab the tax effect of the benefit forgone at 30 per cent would be Rs1.20 lakh against the benefit of Rs75,000 accruing by opting for new regime.
From the above example it becomes apparent that whether one is in 20 per cent tax slab or 30 per cent, the existing scheme is better in case one has he avails all the basic deductions normally availed by persons.
For self-employed person, we can incorporate exclusive benefit available in respect of NPS of Rs50,000 easy understanding and comparison of the example.
Let us move to the an example where the person has income upto Rs 7 lakhs and who will have to pay tax of Rs32,500 if opts new regime. However, if he is able to claim deduction under Section 80 C for Rs1.50 lakhs and a deduction of Rs 50,000 under Section 80 CCD(1B) and reduce his total income below Rs5 lakhs, he will not have to pay any tax by availing rebate u/s 87A upto Rs12,500. So by investing Rs 2 lakh one will be able to save tax Rs32,500 by remaining under old regime.
Why will people not opt for new tax regime
Since salaried people have to forgo benefit of standard deduction, HRA, LTA and there would be
many mandatory items like employee provident fund contribution, life insurance premium, school fee, home loan repayment , it will not make sense for most of the salaried to stay with old regime.
Even for self-employed tax payers who have home loan running will not make any sense to switch to the new regime. In my opinion, since the new tax regime offered will almost be a non starter and is only useful for those people who have liquidity problem and are not able to anyway avail full benefits of Section 80 C and who do not have any health insurance as well as do not have any home loan running. Only a handful of self employed people may opt for this scheme who do not have any running home loan.
Let us see whether the FM amends the new scheme to make it workable.