New income tax structure for FY 2020-21

In order to tax individuals on basis of their earnings (higher tax bracket for high income group and lower tax bracket for lower income group) income tax department levies income tax on individuals on basis of certain range. This range is known as “income tax slab rates” wherein all individuals must pay tax depending on their earning capacity. For FY 20-21 government has introduce new tax scheme. According to new tax scheme, deductions and exemptions cannot be considered and tax shall be appliable on the flat rate of income slab. The current and new slab rate for Financial Year 2020-21 for individuals below the age of 60 Years is mentioned below for reference:

Old Income Tax Slab

For Example:

A person has a gross income of INR 6.6 lacs during the year. His income tax can be computed as below:

As per above example, tax liability of an individual comes to Rs. 44,500/- as per old tax slab after standard deduction of Rs. 50,000 on Rs. 6.6 lacs. Whereas, according to new tax slab the taxable liability comes to 28,500.

To further lower the tax burden, IT department offers individuals to do savings. These savings are further exempted from tax, helping the individuals to pay less.

To understand this better, we have compared the taxable liability in old scheme with savings.

Let’s continue with the example above. In this case, suppose an individual makes his investments as mentioned under:

Gross Income (as mentioned above) = Rs. 6,60,000

Investments made u/s 80C = Rs. 70,000

Net taxable income = Rs. (6,60,000 – 70,000) 5,90,000

Tax liability as per above mentioned slab rates can be calculated as below:

Taxable income = Rs. 5,90,000

Thus, it is clear from the above example, tax burden of the individual has come down from Rs. 44,500/- (as calculated previously) to Rs. 30,500/- due to investment of Rs. 70,000. However, If the employee moves to new tax scheme, then his taxable liability would remain the same i.e. Rs 28500/-

The primary rationale of the provision is, although an individual has to spend Rs. 70,000 at once out of his pocket to save tax of Rs. 14,000, yet this is beneficial, as the investment amount of Rs. 70,000 stays with the individual and on maturity he receives this money back with interest over 5 years. This can also be seen as forced investment.

We have compared the impact of tax on few salary slabs under old and new tax slab.

Possible Investment options if employee wants to continue with the old tax scheme.

1. Section 80C,

Life Insurance Premium

All premiums paid towards life insurance policies are eligible for income tax deduction u/s 80C I-T Act. Premiums paid for or on behalf of others like your parents/ in-laws is not eligible for deduction.

Unit linked insurance plans

ULIPS are combinations of Life Insurance and Equity Investments. All ULIPS qualify as life insurance policy and the premiums are exempted from income tax benefit.

Pension Fund

Under Section 80CCC, you can invest up to Rs. 1.5 lakh in a Pension Fund of LIC of India or any other private insurer. Any premium paid towards any annuity plan, whether deferred or immediate will give you tax relief in that financial year. Contribution towards pension funds is under a Sub Section of 80CCC which is also a part of the 80C Rs. 1.5 lakh limit.

ELSS (Equity Linked saving Scheme)

ELSS offers to youngsters the potential to earn high returns; albeit with higher risks. Lock in period for 80C purpose is 3 years and dividends and capital gains are tax exempt. Not all mutual funds can provide 80C deduction. Some common examples of ELSS are–SBI Magnum Tax Gain, HDFC Tax Saver, Fidelity Tax Advantage, Franklin India Index Tax Fund, etc. If you invest for long term then, ELSS has potential to give handsome return.

Provident Fund (PF)

For salaried employees PF is a default investment which qualifies for deduction u/s 80C. While employer’s contribution is exempt from tax, employee contribution (i.e., employee’s contribution) is counted towards section 80C investments.

Home Loan Benefit

Home loan benefit is available in two parts – principal and interest. Principal component is exempt and counted under section 80C investment. Interest component is exempt under section 24 of the income tax act depending whether the property bought with home loan is self-occupied or let out. This can be a very effective tool to reduce the tax burden.

Tuition fees deduction u/s 80C

This is an avenue most people are not even aware of. Any amount paid as tuition fee for the education of the first two children of the employee / tax payer is eligible for deduction u/s 80C of I-T Act.

National Savings Certificate

NSC is a good medium-term investment option. NSC can also be pledged as security against a loan to banks. NSC VIII Issue has maturity period of five years, while NSC IX Issue has tenure of 10 years. Trust and HUF cannot invest.

Bank Fixed Deposits

Investment in fixed deposits of scheduled bank with tenure of 5 year is entitle for section 80C deduction.

2. Section 80D

An individual can claim a deduction of up to Rs 25,000 for the insurance of self, spouse, and dependent children. An additional deduction for the insurance of parents is available to the extent of Rs 25,000 if they are less than 60 years of age, or Rs 50,000 (as per the Budget 2018) if your parents are aged above 60.

If both the taxpayer and the parent whom the medical covers have been taken for are aged more than 60 years, the maximum deduction that can be availed under this section is to the extent of Rs.100,000.

The below table captures the quantum of deduction available to an individual taxpayer under various scenarios: