Should you Switch to the New Income Tax Slabs Created in Budget 2020

Will the latest personal income tax slabs announced in the Budget 2020 benefit the taxpayers? Should you switch to these new slabs? As per the calculations, higher-income earners could find the old slabs to be a better option, whereas low-income earners could benefit from the latest slabs. Only people who abandon the deductions and exemptions will be given the option of a switch to the new slabs with a revised lower rate. According to the finance minister, this is totally optional for taxpayers. A person who is presently availing a lot of deductions and exemptions might opt to avail them as well as continue paying tax as per the old regime. 

At the start of 2020-21, it becomes necessary to implement common advice dispensed by our financial advisors: begin the process of tax planning at the start of the financial year. You will have to decide on which regime to opt for when you file your proposed declarations of investment in April. 

Deductions – Can help you save significantly

There are many exemptions and tax deductions – for instance, you can save about Rs.1.5 lakhs u/s 80C, you get an extra deduction of Rs.50,000 towards NPS contribution u/s 80CCD (1B), interest paid on housing loan, house rent allowance, etc., which will become redundant in the latest regime.

However, even in the new slabs, the National Pension System tax break u/s 80CCD(2) continues. In case you opt for the latest regime, this deduction will help in some significant savings provided the option is offered by your employer. Employer’s contribution of about 10% of your salary (which is Basic+ DA) qualifies for tax relief u/s 80CCD(2). The limit for government employees is 14%.

The tax calculations will not include the cess of 4 percent

Those who are just starting their career, can consider the switch. Furthermore, they are not very likely to have commitments u/s 80C in form of investments or they would not be having home loans. These individuals could find HRA claims to be more attractive in case they relocate to a new city and have to pay rent. Finally, this will boil down to the person’s salary structure. 

In case the deductions claimed by a person are limited to investments u/s 80C, the person could opt for the new regime. As per calculations, people earning Rs 15 lakh would have a tax of Rs 14,820 less if they opt for the new regime, if they have standard deductions, the professional tax paid along with investments u/s80C. Generally, a lot of people claim either the HRA exemption or the deduction on interest paid on housing loan, besides the tax benefits received on the premium paid for health insurance.