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From the desk of DILIP JHAJHARIA

How the new Income Tax changes effects out taxes and how to deal with it in new situation

From today onwards I will be bringing for you some tips, some awareness, some knowledge on financial terms, financial rules which will help you understand these better in simple words.

Today I will discuss with you the new Income Tax rule comes into effect with the Financial year 2020-21 w.e.f 1/4/20. In the budget of this year there is a drastic change in the way the Income Tax for an individual will be calculated:-

The new income tax regime came into effect from April 1, 2020. This gives an individual taxpayer the option to either continue with the existing tax regime (with tax-exemptions and deductions) or opt for new tax regime (without 70 tax-exemptions and deductions).

All individuals who have business income or salary income should carefully evaluate whether they want to continue with the existing tax regime or opt for the new one. This is because once they opt for the new tax regime, then they can switch back to the existing tax regime only once in a lifetime.

To choose between the two income tax structures, it is important that you know how much your tax liability comes down to, in both regimes.Surcharge is levied on income above Rs 50 lakh. Health and Education cess at the rate of 4 per cent will be added to the income tax liability in all cases. Individuals having taxable income of up to Rs 5 lakh will be eligible for tax rebate under section 87A up to Rs 12,500, thereby making zero tax payable in the new tax regime.

Under the new tax regime, an individual is eligible for only one deduction under section 80CCD . This section allows deduction on the employer's contribution to the NPS account for maximum of 10 per cent of the employee's salary or uptp maximum of 50000/ in case of others individual. Other commonly availed deductions such as those under sections 80C, 80D etc, and tax exemptions such as HRA, LTA etc. are not available in the new tax structure. The calculation of income tax that you are liable to pay under the new tax regime can be explained with an example. I am taking an example of salaried individual. 

Suppose your total income in FY 2020-21 is Rs 16 lakh. Further, during the year, your employer has contributed Rs 60,000 to your NPS account, which is eligible for deduction under section 80CCD (2). Therefore, your net taxable income will be Rs 15, 40,000 (Rs 16 lakh minus Rs 60,000).

The income tax liability in the new tax regime will be calculated on Rs 15.40 lakh as under. 

(1) There will be no tax on the first Rs 2.5 lakh as it is basic exemption. The income which is still chargeable to tax now left will be Rs 12.90 lakh (Rs 15.40 lakh minus Rs 2.5 lakh).

(2) The next Rs 2.5 lakh (Rs 2.5 lakh to Rs. 5.00 lakh) will be taxed at 5 per cent as per new rates. The tax amount here will be Rs 12,500.The income left chargeable to tax will be Rs 10,40,000.

(3) The next slab of 5.00 lac to 7.5 lacs will be taxed @10% , ie comes to 25000/- at this point, the total tax liability comes to Rs 37,500 (0+12,500 + 25,000) and the income which is still chargeable to tax is Rs 7,90,000. 

(4) Next slab from Rs.7.50 lact to Rs10.00lacs will be taxed @ 15 %. and the tax liability is Rs 37,500. And the income left for taxation is Rs 5,40,000. 

(5)) From point 5, the next Rs 2.5 lakh i,e Rs. 10.00 lacs – Rs12.50 lacs will be taxed at 20% and the tax liability comes out to be Rs 50,000.The income left for chargeable for tax is Rs 2,90,000. And we have reached upto a slab of 12.50 lacs. 

(6) The next slab of Rs.12.50 lacs to Rs. 15.00 lacs will be taxed at 25%. The tax liability will be Rs 62,500. Only Rs 40,000 is left which is still to be taxed.

(7) for this 40000/- the tax rate will be 30% the heighest in this new regime and the tax liability will be Rs 12,000.

So The total tax liability in the new tax regime comes out to be Rs 1,99,500 (0+12,500+25,000 +37,500+50,000+62,500+12,000). Health and education cess will be added to this at the rate of 4 per cent. The cess amount is Rs7,980 and hence the total tax liability will be Rs. 207480/- .

Now we require to compare this tax liability to the tax liability comes in the existing tax regime. Under the existing tax regime we can claim deduction under various sections including 80 cc and for various purposes ranging from insurance, mediclaim, EMI of home 

loan, children tution fee , saving in ppf etc. So for a norlam situation savings and exemption can be claimd easily upto Rs. 310000/- and after consideraing such exemptions the tax comes also to 207480/-. 

Hence the crux is that upto an income of 16 lacs and claiming deductions of 310000/- there is no need to change . Older system is beneficial if u claim more exemptions and if low income 

than 16 lacs. But U have to judge after consulting your tax advisor and depends on case to case.

Dilip Jhajaria

FCA, FCS, GC ( B&F- Sydney)

Chartered accountant 

Entrepreneur and social Leader

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