New Tax regime for Individuals and HUFs.
The new optional tax regime has been provided to Individuals and HUFs by insertion of new section 115BAC in the Income Tax Act, which provides the following: –
On satisfaction of certain conditions, an individual or an HUF has the option to pay tax in respect of its total income at the following rates:
| S No. |
Particulars |
Tax Rate applicable |
|
1 |
From 0- 2,50,000 |
Nil |
|
2 |
From 2,50,001 to 5,00,000 |
5% |
|
3 |
From 5,00,001 to 7,50,000 |
10% |
|
4 |
From 7,50,001 to 10,00,000 |
15% |
|
5 |
From 10,00,001 to 12,50,000 |
20% |
|
6 |
From 12,50,001 to 15,00,000 |
25% |
|
7 |
Above 15,00,000 |
30% |
- This option can be exercised for every previous year before filing of tax return in all cases where the individual or the HUF has no business income,
- In cases where individual or HUF is having business income, the option of the new tax structure once exercised for a previous year shall be valid for that previous year and all the subsequent years.
We have presented an analysis of deduction/exemptions that would now be disallowed, and the consequences of the same.
It has been analysed that new tax regime is not beneficial for salaried employees as deduction of LTA, HRA, standard deduction u/s 16, interest on housing Loan u/s 24b, investments u/s 80C, medical premium u/s 80D, NPS contribution is not allowed under the new regime. Due to this the tax liability could be higher under the new scheme in the hands of employees as compared to existing normal tax scheme.
|
Income tax Act Section |
Existing |
Proposed |
Impact |
|
10(5) |
LTA exemption can be claimed (once in a block of 4 years) where the employer provides LTA to employee for leave to any place in India Taken by the employee and their family. | NIL, No such exemption is allowed. | Inclusion of LTA in salary component can become irrelevant, if the employee wishes to opt for the new scheme. |
|
10(13A) |
Claim Exemption on HRA if stay in a rented house from the employer as in accordance with Income Tax Rules. | NIL, No such exemption is allowed. | Opting for the new system may imply irrelevance of rent recipient details submission. This can benefit landlords who are receiving rent in cash (below Rs 50,000 per month) and not having a formal rent agreement, as their details shall not be directly referred to the tax authorities. |
|
10(14) |
Other allowance or benefits allowed on actual payment basis. | NIL, No such exemption is allowed. | An employee who tours frequently for official work and is in receipt of a per diem allowance (against which he is able to provide equivalent expense bills) may not find the new system to be beneficial. Also, there may be pressure from such employees on employers to change the design of travel allowances so as to discard ‘per diem allowance’ regimes for official tours. |
|
10(32) |
Exemption for Parents under which the Minor Income is clubbed of Rs 1,500 per child | NIL, No such exemption is allowed. | Otherwise also a very minor exemption. |
|
16 |
Standard Deduction of Rs 50,000/- | NIL, No such deduction is allowed. | Irrelevant for those having an income of up to Rs 5 lacs. |
|
24 |
Homeowner claim a deduction up to 2 Lakhs on interest on Home Loan | NIL, No such Interest is allowed. | The exemption under the old system is significant for those who have availed a home loan and the interest on the same is closer to the upper limit of Rs 2 lacs. Those who do not have a home loan will find it irrelevant. |
|
80C |
Investment from PF, PPF, NSC, Principle on Home Loan etc. Deduction of 1.5* Lakh allowed. Note* Total Deduction Limit of Under Sec 80C+80CCC+80CCD(1) should not exceed 1.5 Lakh |
NIL, No such deduction is allowed. | Those assesses who have already committed themselves to long term investments under these options, such as premiums on life insurance policies, principal amount of home loan instalments will still find it relevant. The deductions available under sec 80 (C) had an implicit benefit of forcing an individual to save/ invest money in certain safe avenues (such as PPF, NSC, Life Insurance Policies). The new regime shall not enforce such a behavioral pattern/ discipline in individuals and the savings discipline and incentive shall be lost to that extent. |
|
80CCC |
Investment made towards specified Pension Policy. Deduction of 1.5* lakh allowed Note* Total Deduction Limit of Under Sec 80C+80CCC+80CCD(1) should not exceed 1.5 Lakh |
NIL, No such deduction is allowed. | Again, exercising the option in the new regime shall discourage individuals from opting for pension policies, which could possibly be detrimental to their interests in old age. |
|
80CCD(1) Employer Contribution |
Contribution made to NPS. Maximum Deduction Permissible is 10% of the Salary up to a limit of 1.5* Lakh Note* Total Deduction Limit of Under Sec 80C+80CCC+80CCD(1) should not exceed 1.5 Lakh |
NIL, No such deduction is allowed. | Disadvantage same as for Sec 80CCC |
|
Combination of Investment made in Employer’s Contribution of NPS, Superannuation fund and Recognized Provident Fund |
No Taxability on any amount paid by employer under these funds. | Taxability of over and above 7.5 Lakh per annum. | Additional tax liability to employees on receiving over and above such limit. However, no difference under old and new regime if such investments are within Rs 7.5 lacs p.a. |
|
80D |
Deduction on Medical Health Insurance as per the specified limit. | NIL, No such deduction is allowed. | The new regime discourages any compulsive investment in health insurance policies and can expose individuals to financial risk in case of hospitalization. It will also adversely affect the business of general insurance companies to some extent. |
|
80G |
Deduction for Donation made to Specified Person. | NIL, No such deduction is allowed. | NGOs/ bodies receiving donations under this section would be adversely affected in the new regime. The new regime will also not permit an individual the flexibility to bring his taxable income slab to a lower level. |
|
Other Deductions like 80DD, 80DDB, 80E, 80EE etc. |
Deductions are allowed | NIL, No such deduction is allowed. | This would be disadvantageous under the new regime for those assessees who are already having running education and home loans and for those with physical disabilities and having disabled dependents or spending amounts regularly on treatment of diseases. |
Additional Notes:
- There is no sweeping generalization as to which regime would prove beneficial to an individual. It would depend entirely on the income components as well as the investment/ expense profile of an individual assessee. Hence, a benefit analysis will have to be carried out by each individual/ employee at the beginning of the year to ascertain the benefit associated with both the regimes and opts for the one offering a higher benefit.
- On an average, individuals having deductions in excess of Rs 2.50 lakhs p.a. do not gain from the new regime. This becomes even more relevant for assessees having annual incomes much in excess of Rs 15 lakhs per annum who would not gain significantly from the new tax regime.
- The new tax regime does not encourage investment/ contribution for certain long term ‘safe’ investments for individuals such as PPF, Life Insurance Policies and Medical Insurance Policies, which have adverse value effects on an individual’s financial profile and could, expose an individual and his dependents to certain types of financial risks. This is a hidden cost of opting for the new tax regime and shaping one’s investment profile accordingly.
- A headache for Payroll Managers and Departments as employees will flood them with requests for advice on the more beneficial regime for them. It will reduce the burden of payroll departments where employees opt for the new regime and proofs of investment do not have to be collected. Overall, cost of payroll delivery is expected to go up. Outsourced payroll service providers may have to request for an increase in per employee charges from their client companies.
- Increased work load and more consultancy opportunities for tax consultants. This would increase their revenue though.
- The new tax regime could adversely affect the business of Life insurance and General insurance companies as also of NGOs. It discourages compulsive saving habits amongst individuals, which could adversely affect capital formation in the long run in an economy like that of India, where bulk of the savings come from individuals and households, rather than from Corporate Bodies.
