Income Tax Changes from FY 2020-21

 Income Tax Changes from FY 2020-21

It is well known that the income tax is levied on income, more the income, more the tax payable. There are different slabs on which basis, the income tax liability is computed in the hands of individuals of India. The budget of the year 2020 revised the tax rates which will be applicable from FY 2020-21. 

The new slabs are:

(i) Up to 2.5 Lacs – NIL (as earlier, no change);

(ii) From 2.5 Lacs to 5 Lacs – 5% (as earlier, the rebate of 87A will make it NIL if the income is up to 5 Lacs).

(iii) From 5 Lacs to 7.5 Lacs – 10% (earlier it was 20%, however if someone opts for 10% then he/she has to give up the exemptions and deductions mentioned below).

(iv) From 7.5 Lacs to 10 Lacs – 15% (earlier it was 20%, however if someone opts for 10% then he/she has to give up the exemptions and deductions mentioned below).

(v) From 10 Lacs to 12.5 Lacs – 20% (earlier it was 30%, however if someone opts for 10% then he/she has to give up the exemptions and deductions mentioned below).

(vi) From 12.5 Lacs to 15 Lacs – 25% (earlier it was 20%, however if someone opts for 10% then he/she has to give up the exemptions and deductions mentioned below).

(vii) Above 15 Lacs – 30% (as earlier).

Health and Education Cess:

After applying these slabs and computing tax liability, it will be required to levy 4% Health and Education Cess (as earlier, no change).

Which exemptions and deductions will have to be give up, if someone decides to opt new slab rates?

(a) Exemption on House Rent Allowance (HRA): 

Most of the employees claim exemption on HRA. In case, new tax slab rates are opted, the exemption of HRA will not be provided.

(b) Exemption on Leave Travel Allowance: 

It will not be available and it will be fully taxable for the individuals opting new slab rates.

(c) Exemption in Children Education Allowance: 

It will not be available. Those who are taking Children Education Allowance if decides to compute tax in new tax slab rates, their exemption on Children Education Allowance will not be provided.

(d) Standard Deductions on Salary, House Property etc.: 

It will not be provided to the individuals who want to compute their tax liability with new tax slab rates.

(e) No Exemption on ‘Interest on House Loan’: 

The individuals taking house loan for building or purchasing self occupied property are eligible to get deduction on up to Rs. 2 Lacs of amount paid for Interest on House Property and in case, the house is let out, the deduction has no limit while computing income from House Property. But if an individual takes the new slab rates in consideration, then there will be no deduction available for ‘Interest on House Loan’.

(f) Deduction of Section 16: 

The deduction under section 16 which is for entertainment allowance and employment / professional tax will not be available for the individuals opting new tax regime.

(g) Deduction on Family Pension: 

It is presently allowed under section 57 (iia) up to Rs. 15000 which will not be allowed if an individual opts the new tax regime.

(h) Deductions for disability under section 80DD and 80DDB: 

These are available now but the individuals who decides to pay tax as per new tax regime, will not allowed to claim these deductions.

(i) Deduction for Donations under section 80G : 

It will also not be available for those who opt for new tax regime.

(f) Deduction under section 80C, 80 CCD (1B), 80D, 80E etc.: 

The 80C investments and savings will not provide any deduction however these investments are still lucrative keeping in mind the state of economy and the returns from the banking and post office instruments. Further, the medical insurance premium paid and claimed under section 80D will also not be available. However, the contribution by an employer in the account of EPF or NPS up to Rs. 7.5 Lacs in a Financial Year will not be taxable in the hands of employee.

However, deduction under section 80 CCD (1B) can be claimed on 10% of (Basic Pay + Dearness Allowance) if contributed on behalf of employee in Tier – I account of NPS. If contribution is made more than 10% then it will be taxable in the hands of employee and no deduction will be provided on that part of contribution in Tier-I account of NPS. To know how money grows in NPS account, kindly go through "How Money Grows in NPS"

The section 80CCD (2) will also remain available even if the new tax regime is opted by the employee. It is deduction for employer’s contribution in pension funds including NPS.

The deductions provided in Chapter VIA of the Income Tax Act i.e. like section 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc; will not be available for the individuals opting for new tax regime.

*Copyright © 2020 Dr. Lalit Kumar. All rights reserved.

This article is written by Dr. Lalit Kumar Setia; a renowned author and trainer. The article was published on 1^st September, 2021 and last updated on 4^th September, 2021. The writer can be contacted on lalitkumarsetia@gmail.com

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