New Delhi: Finance minister Nirmala Sitharaman, in her budget speech on 1 February, said that “data is the new oil”. So we looked at the data available to find out if there are any beneficiaries of the new tax regime. While the tax rates and slabs looks attractive under the new regime, the condition that you will not be able to claim exemptions and deductions, which help you bring down your taxable income, acts as a deterrent for most taxpayers.
Further, according to data available with the tax department for assessment year (AY) 2018-19, 75% of the total income tax return (ITR) filed had “returned income” below ₹5 lakh. Returned income is the total income after deductions under Chapter VI-A (Section 80C to 80U) and Section 10A/10AA, wherever applicable. Since the government enhanced the rebate to ₹12,500 last year, those having net taxable income of up to ₹5 lakh don’t have to pay tax. This means that the new regime does not make a difference to those with a returned income below ₹5 lakh.
On an average, during AY19, an individual ITR filer claimed a deduction of ₹80,500. About 55 million individual ITR filers claimed deductions and exemptions of approximately ₹4.4 trillion under Chapter VI-A and Section 10A/10AA. If we were to take other popular deductions and exemptions into account, even those earning a gross income of up to ₹10 lakh can easily reduce their returned income to below ₹5 lakh. Note that 90% of the total ITR filers had gross income of up to ₹10 lakh in AY19.
How to reduce your taxable income?
There are certain sources of income that are exempt from tax. For instance, house rent allowance (HRA) is tax-exempt, depending on certain conditions.
While calculating your tax liability, you need to reduce the exempt sources of income from the gross income. The next step is to claim deductions such as standard deduction of up to ₹50,000 available to salaried individuals. Half of ITR filers had salaried income during AY19. Those who are not salaried but live on rent can avail a deduction under Section 80GG of up to ₹5,000 per month.
The next bit that you could remove from your taxable income could be the investments or expenses incurred on specified avenues that qualify for deduction. For instance, you can claim deduction up to ₹1.5 lakh under Section 80C for investment made in equity-linked savings schemes, Public Provident Fund, National Savings Certificates and so on. Also, expenses such as children’s tuition fee, stamp duty paid on the registration of a residential house also qualify for a deduction under the same section. Other sections such as 80D, 80E and 80G also offer the deduction benefit.
After all the exemptions and deductions, if your taxable income reduces to below ₹5 lakh, an ITR filer will have to pay no tax, thanks to the benefit of rebate.
You need not spend extra to save tax
Many people are arguing that the new tax regime will leave more in the hands of individuals as they won’t have to spend on investments to save taxes. However, some exemptions and deductions do not need you to spend extra.For instance, a salaried individual has to spend nothing extra to avail of standard deduction; HRA exemption, if you live on rent; and so on. Moreover, in many cases, the Section 80C limit gets exhausted by the mandatory Employees’ Provident Fund (EPF) contribution and children’s tuition fees.
Besides, most people have life and health insurance policies, and investments for retirement, and most of these instruments offer the tax deduction benefit.
“In general, if you are making use of HRA, 80C and medical insurance, you should go with the old regime. Those who are not taking advantage of these can opt for new regime,” said Varun Girilal, co-founder and executive director, Mitraz Investment Advisors.
Take the help of online tax calculators or experts before making a decision.
Source: livemint
