How to do Income Tax Calculation for FY 2020-21? Which Tax Structure to Select?
As per budget 2020, you cannot claim any tax deduction or exemption if you plan to opt new tax structure. So, as an individual tax payer if you opt for the new tax regime with reduce tax rate you need to forgo all tax breaks available today. Fortunately, you have option to continue with old tax structure. Salaried person can switch between old and new tax structure.
Firstly, we will talk about which tax deduction and exemption you need to forgo in case you opt for new tax structure with reduce tax rate. Secondly, we will take few test cases and do income tax calculation for FY 2020-21 to know which tax structure to select?
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List of Tax Deductions and Exemption not allowed in new Tax Structure
1 Tax Deduction Under Section 80C
The most popular tax deduction of 1.5 Lakh under section 80C is not applicable for new tax structure. This means you cannot claim any benefit for investment made in the instruments such as PF, PPF, Life insurance premium, school tuition fees of children, ELSS, PPF, NPS etc.
You can claim deduction under section 80CCD for the employer contribution on account of employee for NPS.
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2 Tax Deduction Under Section 80D
No tax deduction is allowed for the medical insurance premium and preventive health checkup under section 80D for new tax structure.
3 No LTA Benefits
For new tax structure LTA – Leave travel allowance exemption which is currently available to salaried employee for twice in block of four years is not allowed.
4 HRA
HRA is house rent allowance. HRA is paid to salaried individuals by employer as a part of salary. Earlier taxpayer was able to claim HRA up to certain limit. In new tax structure it is not permissible.
5 Standard Deduction
A standard deduction benefit of Rs.50000 currently available to salaried tax payer is not applicable in new tax slab.
6 Section 80TTA Benefits
Section 80TTA provides deduction of Rs.10000 on interest income. On new tax regime this benefit is not available.
7 Section 80DDB Benefits
Benefits for disability under section 80DDB up to Rs.40000 not available in case you are planning to opt for new reduced tax structure.
8 Section 80E Education Loan
Tax break permissible on the interest paid on education loan will not be claimable under section 80E.
9 Section 80G of Donation
You were able to make donation under section 80G and claim income tax benefit of equivalent amount. The said deduction is not available in reduced tax structure.
10 Section 24 Home Loan Interest
Under section 24 of the Income tax act, an individual was able to claim tax deduction on the interest payment on the housing loan up to a maximum amount of Rs.200000. This benefit is not extended if you opt for new tax structure.
Other deduction applicable under chapter VIA like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) These Tax Section are not entitled for New Tax Regime – Only allow to get relief who are Opt in Old Tax Regime.
Income Tax Calculation FY 2020-21 (AY 2021-2022)
Now let’s calculate actual tax benefits by doing Income Tax Calculation and comparing both the tax structures in various cases.
Case 1 – Salaried Individual claiming common deduction (80C,80D) and Home Loan Benefits
In first case I will take example of salaried individual with income of 20 Lakh & 10 Lakh. Let’s consider in both the cases individual takes benefits of standard deduction Rs.50000, deduction of Rs.1.5 Lakh under section 80C, Rs.25000 under section 80D and Interest on home loan up to Rs.200000.
Now two options are available to the salaried individual. First he/she can opt for old tax structure with all above deduction or he/she can forgo all deduction and opt for new reduced tax structure.
If individual has annual income of 20 Lakh and old tax structure is opted with tax deductions. Applicable tax is 2.85 Lakh. If new tax structure is adopted applicable tax amount is 3.37 Lakh. Similarly, if annual income is 10 Lakh and old tax structure is adopted applicable tax is Rs.27500. For new tax structure applicable tax is Rs.75000. Calculation is given below.
Example Picture of Calculation of Tax 1 and 2
Case 2 – Salaried Individual claiming common deduction under section 80C, 80D and Standard Deduction
In second case let’s assume that salaried individual is taking full benefits of section 80C, 80D and standard deductions as of now. Under new tax regime these deductions are not applicable. Suppose income level of individual is 10 Lakh. If old tax regime is selected payable tax is Rs.70200 on the other hand if new tax regime is selected payable tax is Rs.78000.
Gross Income Rs/- | Tax as per Old Tax Structure Rs/- | Tax as per New Tax Structure Rs/- | Additional Tax Saving Rs/- / Payable |
7.5 Lakh | 18200 | 39000 | -20800 |
10 Lakh | 70200 | 78000 | -7800 |
12.5 Lakh | 124800 | 130000 | -5200 |
15 Lakh | 202800 | 195000 | 7800 |
20 Lakh | 358800 | 351000 | 7800 |
Case 3 – Salaried Individual not claiming any deduction or exemptions
In third case let’s assume that salaried individual is not claiming any deduction of exemptions as of now. So, under new tax regime he/she will get benefit of reduced tax rates and he/she needs to pay less taxes. Suppose income level of individual is 15 Lakh. If old tax regime is selected payable tax is Rs.257400 on the other hand if new tax regime is selected payable tax is Rs.195000 only.
Gross Income Rs/- | Tax as per Old Tax Structure Rs/- | Tax as per New Tax Structure Rs/- | Additional Tax Saving Rs/- |
7.5 Lakh | 54600 | 39000 | 15600 |
10 Lakh | 106600 | 78000 | 28600 |
12.5 Lakh | 179400 | 130000 | 49400 |
15 Lakh | 257400 | 195000 | 62400 |
20 Lakh | 413400 | 351000 | 62400 |
Conclusion:-
From abovecases example it is obviousthat in most ofthe cases old tax ratewith deduction offers higher tax benefits. New reducedtax rate is helpful onlyif you are notclaiming any deductions as ofnow. (which is very rare)
If you have home loanand higher income you will gethigher tax benefits in oldtax rate compared to newtax rate.
From abovecases example it is obviousthat in most ofthe cases old tax ratewith deduction offers higher tax benefits. New reducedtax rate is helpful onlyif you are notclaiming any deductions as ofnow. (which is very rare)
If you have home loanand higher income you will gethigher tax benefits in oldtax rate compared to newtax rate.
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