Finance Minister Nirmala Sitharaman announced the Budget 2020 on 1st February and Salaried Individuals are very confused as to what this Budget means for them. Worry not!
We are here to simplify the Budget for you. The FinMin introduced an optional New Tax System which excluded all major Deductions. The Budget as deemed by FinMin will simplify Personal Taxes, but it seems like it has done the exact opposite!! There is a lot of confusion and chaos as to which Tax System to follow. Let us understand what this Budget could mean for you.
It’s the classic Blue Pill- Red Pill Conundrum!
Looks like we, the taxpayers have been given a Blue Pill-Red Pill Choice…
Under the Budget 2020, Taxpayers have been given a choice:
- To follow the Current system and continue to claim deductions
or
- To follow the New system and have no exemption or deduction.
Let us understand this further by example.
Incumbent Tax System
Suppose your Annual Income is INR 7.5 Lakh. Now, should you choose to follow the Current System, you are entitled to avail 80C, 80D and Standard Deductions amounting to INR 2,25,000
Under the Current System, Income up to INR 2.5 Lakh was exempted from being taxed. That leaves INR 2,75,000 (7,50,000- 2,50,00- 2,25,000) to be taxed. Now, the income between INR 2.5 Lakh- INR 5 Lakh is to be taxed at 5%,i.e INR 12,500 (5% of INR 2.5 Lakh). And the remaining INR 25,000 is to be taxed at 20%, i.e INR 5,000. Which ads up as INR 17,500 in Taxes and the amount that you take-home salary will be INR 7,32,500 (7,50,000- 17,500). Note: This figure is without making 80C, 80D investments.
New Tax System
Now, Let’s say that your Annual Income is INR 7.5 Lakh and you decide to follow the New Tax System. In this case, the Tax calculation becomes very easy. Income between INR 0- INR 2.5 Lakh is exempted from being taxed. Income between INR2.5- INR 5 Lakh is to be taxed at 5% i.e 12,500. Subsequently, the remaining amount of INR 2.5 Lakh (income bracket of INR 5 Lakh- INR7.5 Lakh) is to be taxed at 10%, i.e INR 25,000.
So, you’ll be paying a total of INR 37,500 in Taxes and your take-home salary will amount to INR 7,12,500 (7,50,000- 37,500).
Take a look at the image below to have a better understanding.
Current Tax system
Pros
- Individuals get to invest in their preferred investment schemes and get a benefit of deduction while paying taxes.
- Salaried Individuals who live in a rented property can claim a benefit of HRA and Standard Deduction.
Cons
- The Income Tax slabs rates are higher.
- It is very complicated for a common man to understand all the applicable deductions out of 100 or more deductions.
- Individuals often end up making investments without keeping in mind their financial goals just to get a tax benefit.
- Complexity while filing ITR.
New Tax System
Pros
- The Income Tax Slab rates are lower.
- It allows individuals to have more Take Home Salary.
- A simplified Tax Structure i.e, Ease in filing ITR.
- Individuals can invest freely according to their financial goals without any compulsion to make an investment to avail deduction.
Cons
- Discourages New Homebuyers since no benefit will be available on Interest paid on Home Loans.
- Salaried individuals who live in rented properties will not be able to claim Exemption on HRA which will increase their tax burden.
- Discourages the ‘Savings’ Culture since investment schemes will not provide any tax benefits under 80C.
For comparison take a look at the image below.
Finance Minister Nirmala Sitharaman has tossed the ball into our courts. Now, it is our turn to make a choice. Looks like, it all boils down to what your Personal Finance goals are? If you want to have more cash on hand, the New System is the way to go. But if you want to plan for the long run and make periodical Investments, the Current System is the answer.
To summarize, before hastily deciding which system to follow, We suggest you understand the nitty-gritty of the same and how it might affect your personal finance goals.