Every year, every taxpayer has their eyes peeled as they stare at the Union Budget to see what things have become pricier, what items have become cheaper, and what are the best tax-saving investments under the new regime.
And every year, you may either feel happy and confident about the new budget or feel flustered about how the income tax savings limit is going to affect you.
Union Budget 2020 is no different. The new budget has lowered tax rates to bring reforms in the tax assessment and introduced a few changes that you need to incorporate into your tax saver plan. However, the new income tax savings limit comes with a caveat.
To understand Budget 2020, let us look at budget 2019 highlights of income tax slabs and know how it affects you and the income tax savings limit while redefining the best tax-saving investments for you, as a taxpayer.
Old Tax Regime Vs New Tax Regime
Union Budget 2020 has introduced one significant reform, which is a new tax regime in addition to the old one.
However, the new tax regime is optional that allows the taxpayer to choose whether they want to be taxed as per the new system or the old one. In comparison to the previous budget, Budget 2020 proposes new tax slabs that are comparatively lower than the old tax regime.
Income tax savings under a new tax saver plan as per the new tax regime v/s the old tax regime would look something like the following:
| Income slabs (Rs) | Tax Rate(Old Regime) | Tax Rate(New Regime) |
| Up to 2.5 lakh | Nil | Nil |
| Between 2.5-5 lakh | 5% | 5% |
| Between 5-7.5 lakh | 20% | 10% |
| Between 7.5-10 lakh | 20% | 15% |
| Between 10-12.5 lakh | 30% | 20% |
| Between 12.5-15 lakh | 30% | 25% |
| Above 15 lakh | 30% | 30% |
(Source: indiabudget.gov.in)
Which is Better?
Under the old tax regime, the tax rates and income tax savings limit remains unchanged. As per budget 2019 highlights income tax slabs, the tax rebate was increased from Rs. 2,500 to Rs. 12,500 for taxpayers with a taxable income of up to Rs. 5 Lakhs. Therefore, the tax liability of individuals up to 60 years, senior citizens, and super senior citizens having a taxable income Rs. 5 Lakhs or less was brought to zero.
However, later in 2019, India’s Finance Minister, Nirmala Sitharaman, introduced a surcharge rate of 25% for income between Rs. 2 crores and five crores.
The new tax regime proposes a lower income tax rate for income slabs up to Rs. 15 Lakhs. However, to enjoy the tax savings, you would have to forgo all the exemptions and deductions available under various provisions of the Income Tax Act, 1961.
Exemptions removed in New Income Tax Regime
- Tax savings of up to Rs 1,50,000 lakh under Section 80C
- Deduction of up to Rs 25,000 under Section 80D for medical insurance premium
- Tax deductions for disability under Section 80DD/80DDB
- Leave travel allowance exemption for salaried employees, which could be availed twice in 4 years
- House Rent Allowance to salaried individuals
- Standard deduction of Rs 50,000 for salaried taxpayers
- Tax benefit on interest repaid on housing loan for either self-occupied or vacant residential property under Section 24
- Deduction up to Rs 15000 from family pension under Section 57
- Rebate of up to Rs 12,500 for salaried individuals with income up to Rs 5 lakh under Section 87A
- Deductions on interest repaid for education loan under Section 80E
Even though you have the freedom to choose between old and new tax regimes as part of your tax saver plan, you would have to forgo some of the common yet best tax-saving investments. Therefore, you may have to let go of life insurance plan tax benefits along with the tax savings on other financial instruments such as Unit Linked Insurance Plan, maturity benefits, and health insurance, in case you decide to go with the new tax regime.
Reviewing the budget 2019 highlights and income tax slabs, it is safe to assume that if you are a high-income earner with significant investments in financial products, then you should get taxed in the old tax regime.
Steps to Choose the Right Tax Regime
If you want to simplify the taxation process to maximize your income tax savings limit, then use the following steps:
Understand Your Needs
If your annual taxable income lies between 5 to 15 lakhs, then the tax rates are the same. Therefore, it is better to choose the old regime to avail of the benefit of exemptions.
Check the exemptions applicable to you
Of all the exemptions and deductions removed, you need to check how many applied to you.
Calculate Your Tax Liability
Use this information and income tax saving limit to see how much tax you will have to pay under the new tax regime as well as the old one.
Consider Other Factors
Do not just judge by numbers. Apart from taxable income, you must also take other factors such as lifestyle, investments, and long-term goals, into account before choosing the tax regime.
Plan Your Investments
You can switch between tax regimes change once in every financial year. However, since tax-saving investment options from reputable brands such as Max Life Insurance offer more benefits in the long-run, you are advised to go for the old system to safeguard your pay-outs from being taxed.
If you are planning to invest in some of the best tax-saving investments available, such as insurance plans and other tax-saving financial products, it is advisable to stick with the old regime.
