Union Budget-2020: The Optional Personal Income Tax Regime In India!

Union Finance Minister Nirmala Sitharaman today presented the Union Budget for 2020-21 in Parliament. A few novelties are seen immediately: the Minister’s budget speech of more than 160 minutes proved to be the longest one in history; for the first time the Budget was presented in three innovative categories—Aspiration India, Economic Development and Caring Society with their divisions and sections; a new scheme of setting up solar pumps for farmers having barren lands thus allowing them to earn even without cultivation; identifying 100 water-stressed districts of the country for action in light of the looming water crisis; and a lucrative income tax regime of lower rates which only turns out to be optional. While economists and corporate stalwarts had been shouting all these months about boosting up the demand factor in view of a slowdown and growing unemployment the Budget didn’t list out specific measures to increase consumption or to provide more employment opportunities apart from continued focus on infrastructure investment, continuing with lower corporate tax rates, special emphasis on rural development & agriculture, abolition of the Dividend Distribution Tax as a relief to companies, the direct tax concessions and a few others. The opposition parties slammed the budget on these grounds with a few economic experts also joining in saying that it is another missed opportunity for Modi 2.0 to check the slowdown. While the details of allocations will give the final picture on this we will here concentrate only on the complexities inherent in the optional personal income tax regime.

People of India, particularly middle-class salary earners, have been expecting some income tax benefits since years. The government also from time to time promised reforms in personal income tax structure and its simplification. Today, people got ecstatic while watching live television where the Finance Minister announced major tax cuts. Unfortunately, they were blissfully unaware of the rider attached to the concessions. It was only after the news channels started elaborating on the issue that they finally seemed to see the real picture.

The proposed income tax rate cuts come in these slabs: for annual income of Rs 5—7.5 Lac it is 10% as against the earlier rate of 20% for income slab of 5—10 Lac; for income of 7.5—10 Lac it is 15%; for income of 10—12.5 it is 20% as against the earlier rate of 30% for any income above 10 Lac; for income slab of 12.5—15 Lac it is 25% and for income above 15 Lac it is same as the earlier rate of 30%. The earlier decision to exempt taxpayers having a total income not exceeding Rs 5 Lac per annum has been retained while for others the new rate is 5% for income of 2.5—5 Lac as earlier. Straightaway, we can arrive at sizable cash benefits for taxpayers at every income level, and this was bound to cheer the salary earners. But then the rider!

The Finance Minister, after announcing the huge benefits accruing from the rate cuts, clarified that to simplify the tax structure she had removed about 70 exemptions associated with income tax, and that the new tax regime means taxpayers would no longer be able to avail of such exemptions. She further said that taxpayers are welcome to choose—they can stay on with the old tax regime or can opt for the new one. This has set in motion a calculation spree among people which may well continue or even intensify in the coming months.

We will take a few examples of exemptions not to be granted in the new tax regime which include deductions under 80C or 80D, Leave Travel Concession (LTC), house rent allowance, entertainment allowance, professional tax amount and so on. Now, for a big family the LTC amount, if they want to avail the facility at least once a year, will be quite high and if the salary earner of the family opts for the new regime this full amount will be taxable, as per the rate applicable depending on his/her total annual income; this holds for other amounts too relating to other abolished exemptions. Similarly salary earner of a family living in a rented house will not be able to file for house rent exemption if s/he opts for the new regime. Therefore, it is bound to involve complex calculations as to which regime will be better under what conditions or lack of conditions.

For the first time in India an option is being offered for different income tax regimes, and the taxpayers at the moment are unable to rejoice at the proposed ‘bonanza’. The Finance Minster asserts that this is only the beginning of direct tax reforms in the country and of a simplified tax structure to be realized in near future.