Budget 2020 has ushered in an important change in terms of income tax regimes. This time, there is a new tax regime that will coexist with the old one. The aim is to simplify the income tax regime and offer a great deal of flexibility to taxpayers at an individual level. In that sense, the Budget has ensured that the individual taxpayer gets a certain amount of control and choice.

Opinion is divided on whether this new income tax regime is simplified or has turned out to be complicated.

So, what exactly is the dual tax regime?

One of them is the existing income tax regime and the other one is the new tax regime. The latter does away with exemptions; 70 of them will be gone. As part of the new tax slabs, those in the Rs 5 to Rs 7.5 lakh will need to pay a 10 percent tax as opposed to the old/existing regime wherein they had to pay 20 percent. The other slab that one should take note of is the Rs 10 to 12.5 lakh bracket where the existing tax rate is 30 percent while the new tax regime reduces that to 20 percent. In the Rs 12.5 to 15 lakh category, the existing/old tax regime has a tax rate of 30 percent while the new tax rate stands at 25 percent. The new tax regime, thus, lowers taxes.

(Source: Financial Express*)

Cases where tax rates are the same

In the above Rs 15 lakh category, both existing and new tax rates are the same at 30 percent. Also, under Rs. 2.5-lakh category qualifies for an exemption of income tax under both the tax regimes. The Rs 2.5 to 5 lakh bracket is eligible for a 5 percent tax rate under both the existing and new regimes.

The question of exemptions

If you were to opt for the new regime, as many as 70 exemptions including standard deduction, house rent allowance (HRA), leave travel allowance (LTA), medical insurance premium and life insurance premium, among others have been removed. If you are someone claiming or wishing to claim these deductions, then the old income tax regime is the one for you. The new tax regime is suited for those with not many investments. You can then opt for the new scheme.

The existing/older tax regime, which offers a wide range of tax benefits in the form of exemptions, incentivizes savings. 

Simplification in the new tax regime

The element of tax simplification is inherent in the new income tax regime. You don’t have to bother about complicated filing procedures. It saves you hassles and also lowers or removes the possibilities of errors in filing. In that sense, the Budget has indeed simplified the tax regime. The absence of exemptions such as LTA and HRA makes tax filing more streamlined and straightforward.

The idea of offering taxpayers to switch to one of the two schemes every year lends flexibility and greater choice, which is also an advantage.

The complicated element

The simplified new tax regime only comes into play after an individual decides on which tax regime to pick. But to arrive at that decision, an individual taxpayer may have to make calculations, check his/her investment profile, and then take a call. The complication lies in the decision-making; ie, which tax regime to pick for a year. The average taxpayer may need professional help to arrive at the decision.

Key takeaways

In conclusion, the system of dual tax regimes announced in the Budget is both simple and complicated at the same time. The simplicity lies in the ease of the new tax regime filing process and the idea of flexibility and choice for the individual tax-payer. A tax-payer will have to choose one of them for a specific assessment year and can switch to the older regime in the next year or vice-versa, depending on what is more advantageous. This puts the control in the hands of the individual. The complexity may lie in the fact that the individual has to compute what’s the best option and then choose one of the two regimes.

If you are looking to take home loans or opt for life insurance, you may have to understand the differences in terms of tax benefits under the two regimes. Explore Tata Capital home loans or insurance schemes and decide which IT tax regime you want to pick for this year, based on the financial product of your choice.

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