India is the second-most populous country; seventh-largest country by area and the most colossal democracy in the world. To run such a cosmic nation, the government requires a lot of resources. Such resources are collected in form of taxes, the primary aim of which is to fund the governance of the nation. The money so raised is expended to carry out various functions i.e. building the economic infrastructure viz. roads, public transportation, sanitation, legal systems, public safety, education, health care facilities, military, defense, scientific research, culture and art, public insurance, etc.
The taxes, in India, are of 2 types namely direct taxes and indirect taxes. The implementation of both the taxes differs.
Under direct tax, the onus for payment of taxes, lies directly, on the person earning the income on which such tax is payable, such as, income tax, corporate tax, minimum alternative tax (MAT), alternative minimum tax (AMT), etc.
However, under indirect tax, the onus of tax payment lies on the other person, who at first, collects the tax and then deposits the same with the government on the tax payer’s behalf. E.g. goods and services tax (GST), value added tax (VAT), excise duty, custom duty, etc.
Thus, the onus of payment i.e. direct under the former and indirect under the latter is the basic principle that distinguishes taxes into direct tax and indirect tax.
An individual or Hindu Undivided Family (HUF) is liable to pay tax, directly to the government on the income that they earn during a financial year. The levy/financial charge so imposed is known as income tax. Income tax is thus, tax on the total income of a person.
Before the Budget 2020, such income tax was payable by an individual or HUF on their respective total incomes after claiming various exemptions and deductions. There was a single method that was applicable to both assesses (we shall address it by the name of old tax regime).
The Budget 2020 introduced, what is called as THE NEW TAX REGIME where taxes on the total income of individuals and HUFs shall be computed differently. This is something which is done for the very first time by the Ministry of Finance.
The new regime was made optional by the government, which lead to extensive confusion in minds of the general public as to which regime would be beneficial to them; what are the conditions that need to be complied with in order to opt the new regime and what would be the future implication of their decision, etc.
In this article, we shall analyze in detail, the newly introduced provisions relating to the New Tax Regime, its scope, applicability, conditions, benefits, etc. which would help you to decide that whether you should opt in for this new tax regime or continue to stay with the old tax regime.
THE NEW TAX REGIME
(as introduced by Budget 2020 and the Finance Act, 2020 w.e.f 1st April, 2020)
Section 115BAC, introduced by the Finance Act, 2020, provides that, the income-tax payable in respect of the total income of a person, being an individual or a Hindu Undivided Family (HUF), for any previous year beginning on or after the 1st day of April, 2020 shall, at the OPTION of such person, be computed at the rate of tax given hereunder:
|
S. No. |
Total Income |
Rate of Tax |
|
1. |
Up to Rs. 2,50,000 |
NIL |
|
2. |
From Rs. 2,50,000 to Rs. 5,00,000 |
5% |
|
3. |
From Rs. 5,00,001 to Rs. 7,50,000 |
10% |
|
4. |
From Rs. 7,50,001 to 10,00,000 |
15% |
|
5. |
From Rs. 10,00,001 to Rs. 12,50,000 |
20% |
|
6. |
From Rs. 12,50,001 to 15,00,000 |
25% |
|
7. |
Above Rs. 15,00,000 |
30% |
Thus, the Act provides for an alternative system of income tax computation under which there would be uniform slab rates for all age groups alike i.e. for individuals aged 18 years and onwards.
The new scheme, so notified, would be available, at the option of the assessee, from the financial year starting from 1st April, 2020 and onwards.
The new scheme has been made optional i.e. the assessee may or may not opt for the new scheme and can, at his option, continue under the old income tax regime which he was following till date.
This seems pretty attractive!
An individual or HUF was earlier liable to pay tax @30% on his total income in excess of Rs. 10 lakh and under this new regime, the monetary limit is substituted by Rs. 15 lakh!
Nothing in this entire world comes without an opportunity cost or sacrifice. If the government extend benefits, it takes back some as well. This is what is popularly known as Quid Pro Quo which means something in return.
Let’s dig a little deeper to find out what shall be the opportunity cost of the new tax regime!
The Act provides that the newly inserted optional tax regime, shall become invalid, for an individual or HUF, if certain conditions are not fulfilled.
To understand these conditions in a better way, we shall now dissect our topic into 2 parts:
|
Part 1 |
For the individuals or HUFs whose total income doesn’t include any income from business or profession |
|
Part 2 |
For the individuals or HUFs whose total income include income from business or profession. |
PART 1 – Individuals and HUFs who have income other than income from business or profession:
SACRIFICING/FOREGOING THE DEDUCTIONS/EXEMPTIONS
To avail the benefits of reduced tax rates, under the new tax regime, individuals and HUFs will have to forego the below mentioned deductions/exemptions:
|
S. No. |
Description of deductions/exemptions that are to be foregone/sacrificed |
Earlier allowed under section |
|
1. |
Leave Travel Concession/Assistance (LTC) |
10(5) |
|
2. |
House Rent Allowance (HRA) |
10(13A) |
|
3. |
Other allowances to meet out expenses incurred in performance of duties, etc. |
10(14) |
|
4. |
Daily/Any Allowance to MPs/MLAs |
10(17) |
|
5. |
Allowance for income of Minor (clubbing of income of minor with parents) |
10(32) |
|
6. |
Standard deduction, deduction for entertainment allowance and any tax paid on employment or professional tax, etc. paid |
16 |
|
7. |
Interest on loan in respect of self-occupied or vacant house property [referred in section 23(2)] |
24(b) |
|
8. |
Deduction for Family Pension |
57(iia) |
|
9. |
All deductions allowed under chapter VI-A some of which are: |
|
|
Deduction in respect of life insurance premium, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc. |
80C |
|
|
Deduction in respect of contribution to certain pension funds |
80CCC |
|
|
Deduction in respect of contribution to pension scheme (NPS)** |
80CCD |
|
|
Deduction in respect of health insurance premia, etc. |
80D |
|
|
Deduction in respect of maintenance including medical treatment of a dependant who is a person with disability |
80DD |
|
|
Deduction in respect of medical treatment, etc. |
80DDB |
|
|
Deduction in respect of interest on loan taken for higher education |
80E |
|
|
Deduction in respect of interest on loan taken for residential house property |
80EE |
|
|
Deduction in respect of interest on loan taken for certain house property |
80EEA |
|
|
Deduction in respect of purchase of electric vehicle |
80EEB |
|
|
Deduction in respect of donations to certain funds, charitable institutions, etc. |
80G |
|
|
Deductions in respect of rents paid |
80GG |
|
|
Deduction in respect of certain donations for scientific research or rural development |
80GGA |
|
|
Deduction in respect of contributions given by any person to political parties |
80GGC |
|
|
etc. |
||
** The benefit of deduction under section 80CCD(2) [where, employer makes any contribution to the account of the assessee, he shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the employer as does not exceed 10% of his salary in the previous year] shall continue to remain available under the new tax regime as well.
Also, the new tax regime can only be opted, without any exemption or deduction for allowances or perquisite, by whatever name called, provided under any other law for the time being in force.
FOREGOING THE SET OFF
The new tax regime shall be available without set off of any loss –
- carried forward from any earlier years, if such loss is attributable to any of the above mentioned deductions; or
- under the head “house property” with any other head of income.
This implies that the loss (that arises primarily due to allowance of interest on loan against house property) under the head “income from house property” for a “rented house” (as deduction of interest on loan against self occupied/vacant house property has been disallowed under the new tax regime) shall now not be allowed, to be set off, under any other head of income except house property and shall be allowed to be carried forward to next 8 assessment years, as per extant law.
Also, for the above mentioned losses, no further deduction shall be allowed in any subsequent years i.e. this loss shall lapse.
MANNER TO OPT-IN FOR THE NEW TAX REGIME
- Individual or HUFs, who desire to opt for the new tax regime, shall exercise such option in the prescribed manner with the return of income (ITR) required to be furnished for the relevant year i.e. in the ITR filed for the F/Y 2020-21 and onwards.
- The option of the new tax regime is optional for each financial year. The assessee can opt in and opt out from this option, as beneficial to him, year after year.
PART 2 – Individuals and HUFs who have income from business or profession:
SACRIFICING/FOREGOING THE DEDUCTIONS/EXEMPTIONS
To avail the benefits of reduced tax rates, under the new tax regime, individuals and HUFs will have to forego the below mentioned deductions/exemptions:
|
S. No. |
Description of deductions/exemptions that are to be foregone/sacrificed |
Earlier allowed under section |
|
1. |
Exemption for SEZ |
10AA |
|
2. |
Additional Depreciation (Depreciation shall however be allowed under section 32) |
32(1)(iia) |
|
3. |
Deductions for: |
|
|
Investment in new plant or machinery in notified backward areas in certain states |
32AD |
|
|
Tea, Coffee and Rubber development account, respectively |
33AB |
|
|
Site Restoration Fund |
33ABA |
|
|
4. |
Various deductions for donations or for expenditure on scientific research |
35(1)(ii)/(iia)/ (iii) & 35(2AA) |
|
5. |
Deduction in respect of expenditure on specified business |
35AD |
|
6. |
Expenditure on agricultural extension project |
35CCC |
|
7. |
All deductions allowed under chapter VI-A** some of which are: |
|
|
Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. |
80-IA |
|
|
Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone |
80-IAB |
|
|
Special provision in respect of specified business |
80-IAC |
|
|
Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings |
80-IB |
|
|
Deductions in respect of profits and gains from housing projects |
80-IBA |
|
|
Special provisions in respect of certain undertakings or enterprises in certain special category states |
80-IC |
|
|
Deduction in respect of profits and gains from business of hotels and convention centres in specified area |
80-ID |
|
|
Special provisions in respect of certain undertakings in north-eastern states |
80-IE |
|
|
etc. |
||
|
Note: All the deductions /exemptions mentioned in Part-1 above, that are, wherever applicable, available to an individual/HUF earning income from business/profession, shall be foregone/withdrawn, if this option is exercised. |
||
** The benefit of deduction under Section 80JJAA [i.e. deduction in respect of employment of new employees] shall continue to remain available under the new tax regime as well.
FOREGOING THE SET OFF
In addition to the above mentioned under this sub-head in Part-1, as applicable;
The new tax regime shall be available, in this case, without set off of any –
- Depreciation from any earlier years, if such depreciation is attributable to any of the deductions, as stated in the table above.
- No deduction of such depreciation shall be allowed for any subsequent years i.e. such depreciation shall lapse.
However, where allowance for depreciation, in respect of a block of assets, has not been given full effect to, prior to the year beginning on 1st April, 2020, corresponding adjustment shall be made to the written down value of such block of assets as on the 1st April, 2020, in the prescribed manner, if this option is exercised.
MANNER TO OPT-IN FOR THE NEW TAX REGIME
Individual or HUFs having income from business or profession, who desire to opt for the new tax regime, shall exercise such option in the prescribed manner, on or before the due date for furnishing the return of income (ITR) for the relevant year.
Such option, once exercised, shall apply to all the subsequent assessment years.
However, such option, once exercised, for any financial year, can be withdrawn only once for a financial year other than the year in which it was exercised and thereafter, the person shall never be eligible to exercise this option, except where such person ceases to have any income from business or profession in which case, the option under Part-1 (i.e. for persons who have income other than income from business or profession) shall be available to him.
Further, if the individual or HUFs, who are covered under Part-2, fail to satisfy the conditions, as stated in Part-2 above, this option, so exercised, shall become invalid for all the subsequent assessment years and other provisions of this Act, as were applicable, shall apply for those years accordingly.
CONCLUSION:
The New Tax Regime, appeared tempting when it was first announced in Budget 2020, however it has various terms and conditions which are to be adhered.
The doctrine of QUID PRO QUO has been followed, in full spirit, by the government and various exemptions and deductions as were previously available to an individual or an HUF have been withdrawn.
For better understanding of all our readers and to give an insight into the practical aspect of the new tax regime, let’s analyze the new regime which provides for reduced tax rates with the help of an illustration.
A resident individual usually avails following deductions while computing his total income:
|
Particulars |
Amount (Rs.) |
|
Leave Travel Allowance (usually for family of 4 members approx.) |
approx. 50,000/- |
|
House Rent Allowance (approx. at Rs. 15,000 per month)* *Amount would be differ as per the salary received and/or rent paid. |
approx. 1,50,000/- to 2,50,000/- |
|
Interest on Housing Loan (Self Occupied/Vacant) |
max. 2,00,000/- |
|
LIC and PPF, NSC, Pension Funds, etc. |
max. 1,50,000/- |
|
Contribution to New Pension Scheme (NPS) |
max. 50,000/- |
|
Health Insurance premium, etc. |
max. 50,000/- |
|
Donations |
max. 5% of Gross Total Income |
|
Savings Interest, etc. |
max. 10,000/- for non-senior citizen; max. 50,000/- for senior citizens |
|
Other deductions for interest on loan for higher education, affordable housing, etc. |
case by case basis. |
|
Total Average of Deductions (generally claimed) |
7,50,000 |
Tax computation under various situations and the net benefit to an individual by opting for the new tax regime over the old tax regime:
|
Description |
Situation-1 |
Situation-2 |
Situation-3 |
Situation-4 |
|
Gross Total Income |
15,00,000 |
15,00,000 |
15,00,000 |
15,00,000 |
|
Less: Deductions |
7,50,000 |
5,00,000 |
2,50,000 |
1,00,000 |
|
Total Income |
7,50,000 |
10,00,000 |
12,50,000 |
14,00,000 |
|
Tax* under Old Regime |
62,500 |
1,12,500 |
1,87,500 |
2,32,500 |
|
Tax* under New Regime |
1,87,500 |
1,87,500 |
1,87,500 |
1,87,500 |
|
Net Benefit |
(1,25,000) |
(75,000) |
- |
45,000 |
*Tax computed without adding health and education cess @4%.
We can see from the above illustration that, to an individual, the new tax regime is beneficial only under Situation 4 i.e. where he is claiming lower deductions. Under Situation-3 he is indifferent as to both the regimes.
Thus, everyone should carefully assess their total income and deductions and evaluate the tax payable under the old and new tax regime to avail the maximum benefit.
The author can also be reached at connect@ujlegal.com
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