Article

Budget Impact on Personal Taxes: Good, Bad or Ugly?

03 Feb 2020

The one big story of the budget was the dual tax regime with individuals now having to choose their tax regime. What does that mean? How the scrapping of DDT and status quo on LTCG tax impacts taxes!

Now you need to choose your personal tax regime

If you thought that only corporates have a dual tax regime to choose from, then think again. Even individuals will now have to make a choice: old regime versus new regime. Check out the new rates of taxes applicable in contrast to the old rates.

Income Level

Old Tax Rate

New Tax Rate

Up to Rs2.50 lakhs

Nil

Nil

Rs2.50 lakhs to Rs5 lakhs

5%

5%

Rs5.00 lakhs to Rs7.50 lakhs

20%

10%

Rs7.50 lakhs to Rs10 lakhs

20%

15%

Rs10 lakhs to Rs12.5 lakhs

30%

20%

Rs12.5 lakhs to Rs15 lakhs

30%

25%

Above Rs15 lakhs

30%

30%

Source: Budget Documents

If you are delighted about the lower tax rates, just think again. Here is a catch! If you opt for the new tax regime, you forfeit most of the tax exemptions. Effectively, you forfeit tax exemptions under Section 80C, Section 80D and even benefits under LTC, HRA and standard deduction. In a nutshell, 70 out of the 100 exemptions will go away. Only a handful of exemptions like the CPF, gratuity, VRS compensation, retrenchment allowance etc will remain. But you give up on the standard deduction of Rs.50,000 and you don’t get any benefit from life insurance premiums, tuition fees or ELSS investments if you opt for the new tax regime. Let us look at the impact on two distinct income levels.

Income of Rs.15 lakhs

Income of Rs.30 lakhs

Details

Old Regime

New Regime

Details

Old Regime

New Regime

Income

15,00,000

15,00,000

Income

30,00,000

30,00,000

Deductions

2,00,000

Nil

Deductions

4,25,000

Nil

Taxable Income

13,00,000

15,00,000

Taxable Income

25,75,000

30,00,000

Tax

2,02,500

1,87,500

Tax

5,85,000

6,37,500

Cess @ 4%

8,100

7,500

Cess @ 4%

23,400

25,500

Tax Payable

2,10,600

1,95,000

Tax Payable

6,08,400

6,63,000

Standard Deduction 50K & Section 80C of 150K

SD + 80C + 80D + Sec 24 considered

There is a marginal benefit at the income level of Rs.15 lakhs but as you go to higher income levels, the old regime appears to be clearly more profitable. You need to make a smart relative assessment before opting for the right tax regime for you.

Dividend tax incidence will now be on the investor

After 20 years, dividend distribution tax has come to an end. DDT was always unfair because it hit the small and large investor alike. It was a steep cost because while the rate was 15%, the effective cost of DDT came to 20.56%. However, promoter groups have to shell out tax at close to 43% on their dividend income. Of course, governments will collect a huge sum by way of dividend tax but it could impact dividend declaration.

Some good news on homes; but only for old regime

The special tax incentive of Rs1.50 lakhs per annum on low cost houses, over and above the existing benefit of Rs2 lakhs under Section 24 of the Income Tax Act has been extended by one more year till March 2021. This benefit will not be available if you opt for the new tax regime.

In addition, the Budget also made some progress on granting partial amnesty in the case of pending litigations and also the move towards faceless appears. But the big story remains the dual regime and the efficacy of the new tax regime.

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Budget Impact on Personal Taxes: Good, Bad or Ugly?

03 Feb 2020

The one big story of the budget was the dual tax regime with individuals now having to choose their tax regime. What does that mean? How the scrapping of DDT and status quo on LTCG tax impacts taxes!

Now you need to choose your personal tax regime

If you thought that only corporates have a dual tax regime to choose from, then think again. Even individuals will now have to make a choice: old regime versus new regime. Check out the new rates of taxes applicable in contrast to the old rates.

Income Level

Old Tax Rate

New Tax Rate

Up to Rs2.50 lakhs

Nil

Nil

Rs2.50 lakhs to Rs5 lakhs

5%

5%

Rs5.00 lakhs to Rs7.50 lakhs

20%

10%

Rs7.50 lakhs to Rs10 lakhs

20%

15%

Rs10 lakhs to Rs12.5 lakhs

30%

20%

Rs12.5 lakhs to Rs15 lakhs

30%

25%

Above Rs15 lakhs

30%

30%

Source: Budget Documents

If you are delighted about the lower tax rates, just think again. Here is a catch! If you opt for the new tax regime, you forfeit most of the tax exemptions. Effectively, you forfeit tax exemptions under Section 80C, Section 80D and even benefits under LTC, HRA and standard deduction. In a nutshell, 70 out of the 100 exemptions will go away. Only a handful of exemptions like the CPF, gratuity, VRS compensation, retrenchment allowance etc will remain. But you give up on the standard deduction of Rs.50,000 and you don’t get any benefit from life insurance premiums, tuition fees or ELSS investments if you opt for the new tax regime. Let us look at the impact on two distinct income levels.

Income of Rs.15 lakhs

Income of Rs.30 lakhs

Details

Old Regime

New Regime

Details

Old Regime

New Regime

Income

15,00,000

15,00,000

Income

30,00,000

30,00,000

Deductions

2,00,000

Nil

Deductions

4,25,000

Nil

Taxable Income

13,00,000

15,00,000

Taxable Income

25,75,000

30,00,000

Tax

2,02,500

1,87,500

Tax

5,85,000

6,37,500

Cess @ 4%

8,100

7,500

Cess @ 4%

23,400

25,500

Tax Payable

2,10,600

1,95,000

Tax Payable

6,08,400

6,63,000

Standard Deduction 50K & Section 80C of 150K

SD + 80C + 80D + Sec 24 considered

There is a marginal benefit at the income level of Rs.15 lakhs but as you go to higher income levels, the old regime appears to be clearly more profitable. You need to make a smart relative assessment before opting for the right tax regime for you.

Dividend tax incidence will now be on the investor

After 20 years, dividend distribution tax has come to an end. DDT was always unfair because it hit the small and large investor alike. It was a steep cost because while the rate was 15%, the effective cost of DDT came to 20.56%. However, promoter groups have to shell out tax at close to 43% on their dividend income. Of course, governments will collect a huge sum by way of dividend tax but it could impact dividend declaration.

Some good news on homes; but only for old regime

The special tax incentive of Rs1.50 lakhs per annum on low cost houses, over and above the existing benefit of Rs2 lakhs under Section 24 of the Income Tax Act has been extended by one more year till March 2021. This benefit will not be available if you opt for the new tax regime.

In addition, the Budget also made some progress on granting partial amnesty in the case of pending litigations and also the move towards faceless appears. But the big story remains the dual regime and the efficacy of the new tax regime.