New Tax Regime FY 2020 –
2021
Simplicity… At What Price?
As we move closer to yet another union budget, let us take a moment to reflect on one of
the most crucial decisions of the previous budget (2020) that has impacted a large
chunk of taxpayers directly; The introduction of a new tax regime.
The clamour for
a revision in the existing tax slabs has been growing for long and the
introduction of a new tax regime certainly appeared to have been a step taken
in the right direction…. At least on the face of it…
For now, let’s reserve our
judgment and delve into what this new regime has to offer.
One of the
striking features of this change is the co-existence of two regimes; the OLD
Regime and the NEW. This now puts the onus on the taxpayer to make an informed choice between the two regimes.
So let’s do a
detailed analysis of the benefits offered by the new regime vis-à-vis the old
one. We will do a comparative analysis of the two tax regimes across various
income groups based on the extent of deductions availed.
General
Note:
1.
We have not considered any deductions under the NEW REGIME. About 70 deductions
including the popular ones have been disallowed under the new Regime.
2.
The New Regime does retain some benefits like home loan interest deduction for
let out property and NPS deduction on employers contribution. However these
have not been considered in our computations
3.
The maximum salary considered is Rs.15,00,000/- as the incremental tax beyond
this amount is the same under both the regimes.
4.
The analysis has been presented largely from the point of view of salaried
individuals. However with a few relevant adjustments, the same logic can be
extended to non-salaried individuals too.
5.
In case you are not aware of the tax slabs, you may click here to take a quick look.
6.
click here to catch a quick
glimpse of the popular tax deductions and the various scenarios considered.
COMPARATIVE
ANALYSIS of the two Tax Regimes under three different practical scenarios:
Scenario-1
(No Deductions Considered):
Observation (Scenario-1): In the above scenario, No
deductions have been considered while making the comparison between the two tax
regimes. The illustration shared in the budget speech considered the same
scenario while quoting the tax benefits offered by the new regime. However,
this is a very unlikely scenario and is possible only if the tax payer has
absolutely no idea of the various tax benefits available to individuals. In
fact in many cases, especially that of salaried employees, a good number of
benefits accrues by way of automatic deductions such as Employee Contribution
towards PF, School Tuition Fee, Life insurance premium, Standard deduction,
etc. Most employers provide food coupons too as part of the salary structure
which is non-taxable up to a certain allowed limit.
All of this makes Scenario 1 highly unlikely and hence
not the right way to compare the two regimes. This takes us to Scenario-2 where
we consider a moderate number of benefits/deductions that can be reasonably
achieved by any individual in an attempt to save taxes.
Scenario-2
(Moderate Number of Deductions Considered):(80C, 80D, Meal
Coupons & Standard Deduction - Total deductions considered to the extent of Rs.2,50,000/-)
Observation (Scenario-2): Scenario-2 shows us that
even with moderate number of deductions availed, the old regime comes out as the preferred option especially at lower income levels. As you can notice above, the benefits
accrued at lower income levels can go up to Rs.39,000/- per annum or a monthly
savings of up to Rs.3,250/-. However, one would notice that the benefits subside
gradually as the income goes up.
We believe that scenario-2 is quite realistic as the
number of deductions considered here is moderate and can be achieved quite
easily. Hence under the given circumstances, there is a strong case for one to
opt for the OLD REGIME, especially at lower income levels.
Scenario-3 (High Number of Deductions Considered):(80C, 80D, Meal Coupons, Standard Deduction, Home Loan Interest, NPS
80CCD1b - Total deductions considered to the extent of Rs.5,00,000/-)
Observation (Scenario-3): Scenario-3 distinctly
brings out the real difference between the two regimes. With a fairly high
number of tax saving deductions under consideration, the difference between the
two regimes is further amplified. The benefits under this scenario can go up to
Rs.78,000/- per annum or a monthly savings of up to. Rs.6,500/-. What is even more
striking is that the benefits remain intact even at higher income levels, thus
proving beyond doubt that the OLD REGIME is a clear winner in this case.
Conclusion:
The above
illustrations clearly tell us that under most practical scenarios, the OLD REGIME
comes out stronger than the new one. In fact, higher the number of deductions
availed, the greater sense it makes to opt for the OLD REGIME.
Although the NEW
REGIME has been touted as a Simpler Alternative to the old one… after looking
at the analysis, our mind begs the question... "SIMPLICITY...At What PRICE?"
Note: We are
writing this article towards the fag end of FY 2020 – 2021 especially for the
benefit of individuals who are yet to make up their mind on the choice of a
suitable tax regime. Remember, you still have some more time to make an
informed choice and plan your investments accordingly.
About the author
Deepak Rameshan, CERTIFIED FINANCIAL PLANNERCM, Dip TD, MMS.
Deepak Rameshan is a CFPCM professional, and has been working in the financial services domain for close to 13 years. He holds a Master’s Degree in Management Studies and a Diploma in Training & Development and has been actively engaged in Training & Content Development during this period. As a Personal Finance Enthusiast and an avid researcher of the subject, Deepak has delivered several Investor Awareness Workshops over the years covering areas such as Risk Planning & Insurance, Retirement & Goal planning, Tax Planning and a few other specialized areas. He takes keen interest in writing and has penned numerous articles for this blog, addressing some of the most relevant concerns that individuals face with respect to their finances.
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