Tax relief—or is it?1 min read . Updated: 01 Feb 2020, 05:30 PM IST
- To avail of lower tax, one will have to give up exemptions
- Benefit of new regime will vary from individual-to-individual
In the face of loud demands for tax relief from India’s rather neglected lower- and middle-classes, Finance Minister Nirmala Sitharaman has finally delivered. Or has she? On the face of it, the tax rate has been cut for different bands of income, which should logically help lower the liability. But there is a catch. To avail of lower rate rates, a taxpayer would have to give up various deductions and exemptions. This means that the new tax structure, being offered as an option, may not lead to a tax reduction after all.
Here’s how the new tax structure is different. Income in the ₹5-7.5 lakh and ₹7.5-10 lakh bands will be taxed at 10% and 15%, respectively; under the old structure, all of it is charged at 20%. Income in the ₹10-12.5 lakh and ₹12.5-15 lakh bands will be taxed at 20% and 25%, while that above ₹15 lakh at 30%. Under the old scheme, all income above ₹10 lakh is liable to 30% tax. But this higher rate permits several deductions and exemptions, which lets taxpayers to lower their effective tax rate.
Therefore, the benefit of the new regime will vary from individual-to-individual, depending on the extent to which these deductions and exemptions are being availed. For someone exhausting them to the maximum possible extent, it may be more tax efficient to stay put with the old structure, and vice-versa. The new option rids taxpayers of ifs and buts, but it doesn’t actually simplify matters. After all, just working out which option to take—the old or the new—could take quite a few calculations. Now that company dividends are to be taxed as part of our income, this will add to the complexity as well. Thankfully, Sitharaman has promised a regime that harasses nobody. For many, this has the biggest potential for tax relief.