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Finance minister Nirmala Sitharaman, in her budget speech on 1 February, said that “data is the new oil". So we looked at the data available on the income tax website to find out if there are any beneficiaries of the new tax regime.

The new regime has seven tax slabs—there’s no tax for income up to 2.5 lakh, 5% for income between 2.5 lakh and 5 lakh, 10% for income between 5 lakh and 7.5 lakh, 15% for income between 7.5 lakh and 10 lakh, 20% for income between 10 lakh and 12.5 lakh, 25% for income between 12.5 lakh and 15 lakh, and 30% for income above 15 lakh.

Graphic: Santosh Sharma/Mint
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Graphic: Santosh Sharma/Mint

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While the tax rates and slabs look attractive under the new regime, the condition that you will not be able to claim exemptions and deductions, which help you bring down your taxable income, acts as a deterrent.

Moreover, the new tax regime will make no difference to those with taxable income below 5 lakh. Since the government enhanced the rebate to 12,500 last year, those having net taxable income of up to 5 lakh don’t have to pay tax. As many as 75% of the total income tax return (ITR) filed had “returned income" below 5 lakh, according to data for assessment year (AY) 2018-19. Returned income is the total income after deductions under Chapter VI-A (Section 80C to 80U) and Section 10A/10AA, wherever applicable.

Graphic: Santosh Sharma/Mint
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Graphic: Santosh Sharma/Mint

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On an average, during AY19, an individual ITR filer claimed a deduction of 80,500. About 55 million individual ITR filers claimed deductions and exemptions of approximately 4.4 trillion under Chapter VI-A and Section 10A/10AA. If we were to take other popular deductions and exemptions into account, even those earning a gross income of up to 10.25 lakh can easily reduce their returned income to below 5 lakh (see graph). Note that 90% of the total ITR filers had gross income of up to 10 lakh in AY19.

How to reduce your taxable income

There are certain sources of income that are exempt from tax. For instance, house rent allowance (HRA) is tax-exempt, depending on certain conditions.

While calculating your tax liability, you need to reduce the exempt sources of income from the gross income. The next step is to claim deductions such as standard deduction of up to 50,000 available to salaried individuals. Half of ITR filers had salaried income during AY19. Those who are do not get HRA but live on rent can avail a deduction under Section 80GG of up to 5,000 per month.

The next bit that you could remove from your taxable income could be the investments or expenses incurred on specified avenues that qualify for deduction. For instance, you can claim deduction up to 1.5 lakh under Section 80C for investment made in equity-linked savings schemes, Public Provident Fund, National Savings Certificates and so on. Also, expenses such as children’s tuition fee, stamp duty paid on the registration of a residential house also qualify for a deduction under the same section. Other sections such as 80D, 80E and 80G also offer the deduction benefit.

The other major deduction is available on home loans. While the principal repayment qualifies for deduction under Section 80C, there are three different sections under which you can claim deduction for the interest component—24(b), 80EE and 80EEA. A maximum of 3.5 lakh can be claimed as deduction against interest repayment using a combination of these three sections.

After all the exemptions and deductions, if your taxable income reduces to below 5 lakh, an ITR filer will have to pay no tax, thanks to the benefit of rebate.

you need not spend extra to save tax

Many people are arguing that the new tax regime will leave more in the hands of individuals as they won’t have to spend on investments to save taxes. However, you don’t need to spend extra to avail of some exemptions and deductions. For instance, a salaried individual has to spend nothing extra to avail of standard deduction; HRA exemption, if you live on rent; and so on. Moreover, in many cases, the Section 80C limit gets exhausted by the mandatory Employees’ Provident Fund contribution and children’s tuition fees.

Those with a home loan, too, need not spend anything extra to avail deduction up to 3.5 lakh under various sections. Besides, most people have life and health insurance policies, and investments for retirement, and most of these instruments offer the tax deduction benefit.

If you are in the highest tax bracket, the new tax regime may not benefit you. “In general, if you are making use of HRA, 80C and medical insurance, you should go with the old regime. Those who are not taking advantage of these can opt for new regime," said Varun Girilal, co-founder and executive director, Mitraz Investment Advisors.

Before making the decision, take the help of online tax calculators and compare the benefits, said Girilal. Evaluate on a case-to-case basis. You need to be doubly careful if you are non-salaried as hopping between the two tax systems may not be possible every year.

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