- Taxpayers in India will be given the option to either file their taxes under the new tax regime or continue using the existing tax regime.
- The new taxation system offers limited exemptions and deductions, but taxpayers will pay lower income tax rates.
- So far, no changes have been announced in the existing taxation system.
In a bid to simplify income tax for individual taxpayers, Finance Minister Nirmala Sitharaman announced a new, parallel, tax regime with revised income tax slabs and tax rates during the 2020 budget presentation.
Taxpayers will have the option to either use the new tax regime or the existing tax regime to file their taxes. However, determining which tax regime is best suited will depend largely on their income and investments, among other factors.
The existing tax system will continue without any changes, and the new tax system is expected to be effective from financial year (FY) 2020-21.
This article will focus on the difference between the two tax regimes, exemptions available under the two tax regimes, and which tax system will be beneficial for an individual taxpayer.
Difference between the two tax regimes
Under the new taxation system, taxpayers will use the revised income tax slabs with lower income tax rates to file their taxes.
Further, individuals will be able to claim very limited deductions and exemptions under this new system. For example, taxpayers can claim deductions on amount received on voluntary retirement, employer's contribution to the central government's pension scheme, and on death-cum-gratuity received, to name a few.
Currently 130 deductions and exemptions are available under the existing tax regime, but around 70 have been removed for individuals who wish to opt for the new tax regime.
So, under the new tax regime individuals will not be entitled to any other exemptions, such as the standard deduction of INR 50,000 (US$702), leave travel concession (LTA), house rent allowance (HRA), provident fund contributions, and tax exemptions on donations to charitable institutions to name a few.
However, if the taxpayer chooses to continue with the existing tax regime, they will be allowed to claim all the current tax deductions and exemptions, including HRA, LTA, medical insurance premium, interest paid on housing and education loan, and public provident fund contributions when assessing their income tax liability.
Taxes for non-resident Indians and foreign nationals in India
An individual will be deemed an Indian resident, if they are not liable to pay tax in any country outside India on account of their domicile, residence, or any other criteria of similar nature. This is an anti-abuse provision and will apply only to income generated from a business or profession in India.
The government also announced that to qualify for the non-resident Indian (NRI) status, the period of stay outside India should be extended to 240 days instead of the existing 182 days.
Meanwhile, to qualify for an employment visa, foreign nationals looking to work in India should meet the minimum salary threshold of INR 1.625 million per annum (US$25,000). This amount falls in the income tax slab of 30 percent under the new as well as existing regime.
Which tax system will benefit taxpayers?
Since the new and existing tax regime will co-exist, taxpayers will have to engage in financial planning to finalize on the best suited tax system. Largely, choosing a tax system will depend on salary structure, expenditure, investment habits, and age of the taxpayer.
For individuals with taxable income below INR 5,00,000 (US$7,029) the tax rates remain unchanged under both the tax systems.
Since the new tax system allows very limited exemptions – for individuals claiming a number of exemptions, such as interest on housing and education loan, HRA, and LTA, among others – the new tax regime will not be beneficial. Therefore, it is advisable that these individuals continue using the existing tax regime.
According to government officials, the new regime will be beneficial for taxpayers who are not interested in making investments to save tax, small businessmen and shopkeepers who do not get benefits like HRA or LTC, and senior citizens living on pension and are not planning to buy a house.
Government sources say that for individuals earning an annual salary of INR 1.2 million (US$16,857) or less and who were availing up to INR 0.2 million (US$2,810) as deductions under the existing tax regime – continuing with the existing tax regime would be beneficial.
Further, the sources added that individuals with an annual salary of over INR 1.3 million (US$18,262) who were availing up to INR 0.2 million (US$2,810) as deductions under the existing tax regime, would save more under the new tax regime.
However, it is best that taxpayers seek professional advice from a financial advisor and carefully compare the benefits before choosing the appropriate tax regime.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.