Impact of New Tax Regime Introduced in Union Budget 2020

Budget 2020 was announced back in February, which introduced us to the new personal income tax regime. The new personal tax regime undoubtedly has grabbed the attention of the million taxpayers in India. So, before we understand the impact of this, let us know what the new income tax regime holds.

The following table shows a comparison between the traditional income tax regime and the new personal tax regime.

Now onwards, the taxpayers have an option to either file tax under the new tax regime or continue following the traditional process. However, if an individual chooses the new personal tax regime, he/she cannot claim under 70 out of the 100 income tax exemptions.

 

Furthermore, the salaried employees who opt for the new income tax regime cannot claim standard tax deductions and exemptions under HRA, investments made under Section 80C, 80D and LTA. We have discussed some of the popular tax deductions and exemptions that are removed from the new personal tax regime in detail below.

As per the new income tax regime, the taxpayer will not be eligible to benefit from several tax deductions and exemptions under the Income Tax Act, 1961. Some of the popular tax deductions and exemptions eliminated from the new regime are as follows -

• The premiums paid towards the investment plans such as Public Provident Fund (PPF) and life insurance policies cannot be claimed for tax deductions under Section 80C.

• The health insurance premiums cannot be claimed for tax deductions under Section 80D.

• Any home loan principal repayment that was exempt under Section 24C will no longer be available in the new tax regime.

• Further, the standard deduction, leave travel allowance, and other allowances are not available for claim in the new personal tax regime.

   

Now that you are aware of the new income tax regime, we will understand the impact of the same on taxpayers.

With the traditional income tax regime, taxpayers have the option to claim tax deductions for several tax-saving investment tools such as life insurance plans, PPF, Unit Linked Insurance Plans (ULIPs), Equity Linked Savings Scheme (ELSS), and more.

 

Besides, the tax benefits under Section 80C includes the principal repayment on the home loan, involuntary contribution to EPF, tuition fees, and more. Moreover, it includes tax benefits on health insurance premiums under Section 80D.

 

All of this is eliminated from the new personal tax regime, making it invaluable for the existing taxpayers. However, every taxpayer (new or existing) gets an option of whether they want to file their tax under the new or the traditional income tax regime. This option is available until the Government of India decides to fully transform into the new regime and terminate the traditional income tax structure.

 

Now, you must be wondering whether you should opt for the new income tax regime or stick to the tradition structure, right?

 

Well, that depends on which one suits you the best. The decision should be made based on your age, annual income, long-term financial goals, investible surplus, and more aligning factors. However, if you want to compare the two tax structures solely based on the tax liability, follow the steps below -

• Start by estimating your taxable income.

• Figure out the total amount of exemptions and deductions that you are eligible for.

• Based on it, calculate the tax liability under the two structures.

• Use the trial and error method, understand the deductions for which the tax liability in both regimes are the same.

After the announcement of the new income tax regime in Budget 2020, it was obvious that the new tax structure is favourable to the new taxpayers in India. However, the traditional income tax regime will prove to be beneficial in the long run and hence complete evaluation of both structures is essential before filing the taxes.

 

So, if you are opting for the new personal tax regime, understanding your financial goals beforehand becomes all the more essential. That way, you will be able to estimate the tax liability for the said year and do not have to lock-in funds for saving tax.

 

As the income tax filing season nears, calculate the amount you have to pay as tax using the income tax calculator available on Bajaj Markets. Besides, you can resolve your tax-related doubts and understand Income Tax in India in detail by visiting Bajaj Markets online.