NEW INCOME TAX REGIME (INDIA): TAX SLABS AND RATES for FY 2020-21
The government of India in its annual budget in 2020 introduced a new flexible tax system which provides taxpayers (individuals and HUFs) an option to choose between two alternative tax structures. Starting financial year (FY) 2020-21, taxpayers may opt for either of the following structures for determining their tax liability and filing their tax returns:
1) Existing Income Tax Regime with tax slabs, rates, deductions and exemptions similar to those applicable in FY 2019-20.
2) New Income Tax Regime with lower tax rates and new tax slabs but extremely limited options for deductions and exemptions. The new tax regime has proposed to remove 70 existing deductions and exemptions.
Each tax regime has its own advantages and limitations. There is no clear answer on which tax regime would be beneficial and result in lower tax payable. This would depend on the size and composition of an individual’s income as well as desired investment plan for availing deductions. A taxpayer may evaluate which plan works best for them and accordingly choose the more suitable option on or before the due date for filing of IT returns for assessment year AY 2021-22 (FY 2020-21).
Salaried taxpayers with no business income can switch between the existing tax regime and new tax regime on a year to year basis with no restriction. However, taxpayers with business income would have the option to switch only once. For example, if a taxpayer with business income opts for the new regime in AY 2021-22, then he would have the choice to switch to the old regime only once. If this taxpayer moves to the old regime in any future year, he will never be able to opt for the new regime again.
Income Tax Slabs & Rates FY 2020-21 (AY 2021-22) - For Resident Individuals less than 60 years of age (both male and female), NRIs (all age groups) and HUF
Note:
1) The following items shall remain same for all taxpayers under both the options (regimes):
a) Rebate u/s 87A (up to Rs 12,500 for taxable income up to Rs 5,00,000). Please note that this rebate is only applicable for resident individuals (not NRIs and HUFs). Refer below for details.
b) Health and Education Cess (paid @ 4% of Income Tax Amount). Refer below for details.
c) Rates of Surcharge paid paid on income above a certain threshold as detailed below:
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10% of Income Tax Amount for Income between Rs 50 lakhs and Rs 1 crore
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15% of Income Tax Amount for Income between Rs 1 crore and Rs 2 crores
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25% of Income Tax Amount for Income between Rs 2 crores and Rs 5 crores
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37% of Income Tax Amount for Income above Rs 5 crores
2) The old tax regime retains all existing income tax deduction and exemptions. However, most of the deductions and exemptions would not be available under the new regime. Below is a list of the key deductions and exemptions that a taxpayer will have to forego while choosing the new tax regime.
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Standard Deduction of Rs 50,000 (for medical and transport)
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House Rent Allowance (HRA)
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Leave Travel Allowance (LTA)
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Allowance contained under Section 10 (14) like travel, relocation, conveyance etc.
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Professional Tax
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Deductions under Chapter VI- A (80C, 80D, 80E and so on) except Section CCD (2)- NPS contribution by employer
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Interest deduction under section 24 for self-occupied house property. For let-out house property interest deduction shall be allowed up to the actual income from house property net of standard deduction (for repairs & maintenance). However, where interest exceeds the net income from let out house property, loss cannot be set-off from other heads and cannot be carried forward.
Income Tax Slabs & Rates FY 2020-21 (AY 2021-22) - For Resident Senior Citizens: 60 years and above but less than 80 years of age (both male and female)
Note:
1) In the new tax regime, there is no benefit for senior citizens in the basic exemption limit. While in the existing tax regime, income up to Rs 3,00,000 is fully tax exempt for senior citizens, the basic exemption limit remains Rs 2,50,00 in the new regime for all taxpayers.
2) The Rebate u/s Section 87A, Health and Education Cess (4% of Income Tax Amount) and Surcharge as applicable shall be same for senior citizens under both the options. Refer below for details.
3) Certain key deductions and exemptions (viz section 80C, 80D, Standard Deduction, Section 24 etc.) shall not be available under the new tax regime as detailed above.
Income Tax Slabs & Rates FY 2020-21 (AY 2021-22) - For Resident Super Senior Citizens: above 80 years of age (both male and female)
Note:
1) In the new tax regime, there is no benefit for super senior citizens in the basic exemption limit. While in the existing tax regime, income up to Rs 5,00,000 is fully tax exempt for super senior citizens, the basic exemption limit remains Rs 2,50,00 in the new regime for all taxpayers.
2) The Rebate u/s Section 87A, Health and Education Cess (4% of Income Tax Amount) and Surcharge as applicable shall be same for super senior citizens under both the options. Refer below for details.
3) Certain key deductions and exemptions (viz section 80C, 80D, Standard Deduction, Section 24 etc.) shall not be available under the new tax regime as detailed above.
Clarification on 87A, Surcharge and Cess
Q.1) What is the meaning of rebate u/s 87A? Does this mean that income up to Rs 5,00,000 is fully tax exempt for all taxpayers?
Answer: Benefits of rebate under section 87A are same for all resident individuals of all age groups under both existing tax regime and new tax regime. This benefit is however not applicable for NRIs and HUFs.
Section 87A provides a rebate of up to Rs 12,500 for income up to Rs 5,00,000 to all resident individuals. In essence this translates to zero tax liability for resident Indians with a net taxable income (income – all deductions) up to Rs 5,00,000.
However, it must be carefully noted that in case the net taxable income (income after all deductions) exceeds Rs 5,00,000 such that the total tax liability is greater than Rs 12,500, then the rebate u/s 87A will not be applicable. In this scenario, the given assessee shall have to pay tax on his entire income falling between Rs 2,50,000 – Rs 5,00,000 (or Rs 3,00,000 – Rs 5,00,000 for senior citizens) @ tax rate of 5% in addition to taxes applicable on his income in slabs above Rs 5,00,000. The following table further clarifies this point.
We can see from scenarios in above table that whenever the tax liability for a taxpayer is greater than Rs 12,500, the rebate u/s 87A is not applicable and the taxpayer has to pay the full tax amount as applicable including tax @ 5% in slab of Rs 2,50,000- Rs 5,00,000. Taking the example of taxpayer C, we can note that:
As per existing tax regime the tax liability for this taxpayer would be: 5% of (Rs 5,00,000 – Rs 2,50,000) = Rs 12,500 Plus 20% of (Rs 6,50,000 – Rs 5,00,000) =Rs 30,000. Since his total tax liability of Rs 42,500 is greater than Rs 12,500, rebate u/s 87A is not applicable and he has to pay the full amount of Rs 42,500 as his tax for the year.
Similarly, even in case of new tax regime whenever the total tax liability of an assessee exceeds Rs 12,500, rebate u/s 87A is not applicable and the full tax amount is to be paid including the tax accrued in slab of Rs 2,50,000- Rs 5,00,000.
Q.2) What is Surcharge. Do taxpayers have to pay surcharge on their full taxable income?
Answer: Surcharge is a tax on tax. It is levied on the income tax amount and not the taxable income.
For example, if an assessee named D has a taxable income of Rs 100 and a tax payable of Rs 30 with an applicable surcharge rate of 10%, then his required surcharge amount would be 10% of Rs 30 = Rs 3. Here his total tax payable would be Rs 33.
Moreover, the surcharge rate is only applicable for income levels above a certain threshold. Provision of surcharge kicks in only when the taxable income of an assessee exceeds Rs 50 lakhs based on the schedule mentioned above. Thus, application of surcharge, in principle is an extension of the progressive taxation system followed in India where high income earners and the super-rich are required to share a greater burden for tax contribution to the treasury.
Q.3) What is Cess? and are all taxpayers required to pay Cess?
Answer: Like Surcharge, Cess is also a tax on tax. All taxpayers (resident individuals, NRIs & HUFs) who are liable to pay tax also have to pay health and education cess @ 4% of their income tax amount.
In case of high-income earners who are also liable to pay surcharge, they need to pay health and education cess @ 4% on their full tax liability including surcharge. For instance, the cess for assessee D as mentioned in previous example would be 4% of Rs 33 = Rs ~1. Hence his total tax payable would be Rs 30 (tax amount) + Rs 3 (surcharge)+ Rs 1 (cess) = Rs 34.