Lower income tax in Budget 2020: ₹78,000 gain or ₹7,800 loss?

New Delhi: The euphoria about personal income tax cuts was short-lived. Only a few taxpayers stand to benefit from the new tax regime announced by the finance minister.

Introducing the new regime, Nirmala Sitharaman claimed that taxpayers who give up certain deductions and exemptions stand to save as much as ₹78,000 in taxes a year.

For instance, a person earning ₹15 lakh in the proposed tax regime will pay ₹1.95 lakh as tax, while a person in the old regime will pay ₹2.73 lakh, if no deductions are claimed by either. Sitharaman said a taxpayer who doesn’t claim any deductions still stands to gain in the new regime even if he was availing deductions worth as much as ₹1.5 lakh earlier.

That assumption may be faulty because she has used deductions available under Section 80C, one of the many available to a taxpayer, to come to the conclusion. If we add other deductions that stand removed in the new regime, the maths changes. For example, if we add the standard deduction of ₹50,000 available to salaried individuals, Section 80C deduction of ₹1.5 lakh, ₹25,000 for mediclaim premium and ₹50,000 for NPS investment, the person will lose ₹7,800 under the new system.

In the new regime, there are now seven tax slabs—no tax for income up to ₹2.5 lakh; 5% for income between ₹2.5 lakh and up to ₹5 lakh; 10% for income between ₹5 lakh and up to ₹7.5 lakh; 15% for income between ₹7.5 lakh and up to ₹10 lakh; 20% for income between ₹10 lakh and up to ₹12.5 lakh; 25% for income between ₹12.5 lakh and up to ₹15 lakh; 30% for income above ₹15 lakh.

If other deductions are availed, the taxpayer stands to lose more. For instance, if a taxpayer pays rent and claims exemption for it, the person loses more in the new regime. Only those who claim very few deductions and exemptions will benefit from the new tax system.

That means, for most income taxpayers, the budget has little to cheer about.