Know your Income Tax : Present Vs.Proposed - Budget 2020

Know your Income Tax : Present Vs.Proposed - Budget 2020

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New Income tax rates have been announced in the Budget 2020. Prima facie it appears that the rates have been reduced. But is it really so? Let us compare the present rates with the new rates.

 As of now, the income tax rates are as follows. For the income accounted in the financial year 2019-20 (Assessment year 2020-21. Income of the previous year is assessed in the subsequent year), the following rates are applicable .

credit: OWN Table1

For example, if your taxable income is Rs.760000/-and you are below 60years category , then the tax liability is calculated as follows:

credit: OWN Table2

·Further,

• ·       Under section 87A of the income tax act,  total tax rebate is available if the taxable income is below Rs.5 lakhs. So if the taxable income is below Rs.5 lakhs no tax needs to be paid.
• ·       Apart from the above liability, Health and Education CESS calculated at the rate of 4% on the tax amount is also to be paid by all.
• ·       In addition to that,  surcharge is to be paid by the super rich category (Above Rs.50lakhs) depending upon the taxable income. 

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The above taxable income is arrived at after taking into account the various exemptions and deductions available in the Income Tax Act. i.e from your total income, the deductions are made to arrive at the taxable income.Some of the main exemptions and deductions available are :

• Standard deduction of Rs.50000  under Section 16 in respect of salaried employees.
• Deduction of Employment/Professional tax paid   under section 16
• House rent Allowance to the extent allowed under Section 10(13A)
• Leave Travel concession allowed under section 10(5)
• Interest under section24 in respect of interest paid for home loans
• Chapter VI A deductions (The limit is Rs.150000 under section 80C for certain investments)
• Deductions in respect of some of the allowances under section 10(14).

credit:OWN

Coming to the new rates announced in the Budget, these new rates are applicable from the financial year 2020-21 (Assessment year 2021-22). But to avail these new reduced rates you have to forgo the exemptions and deductions discussed above except that deduction under Section 80CCD(2) towards NPS (National pension system) contribution to the extent of Rs.50000/ is eligible. The new rates are as follows:

credit: OWN table 3

In other words these new rates are applied on your total income without availing the above exemptions/ deductions. So though the rates are reduced, the total tax liability may not be a reduced.one, in fact, for many it will be more.It appears that the new rates are beneficial only for those who intend to claim deductions for more than 2 lakhs.

The new rates are optional. However, the option once exercised can not be withdrawn if you have business income. Otherwise the option can be exercised every year. So one has to carefully workout as to whether it is beneficial for her/him to avail of the new rates.