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Income tax, 80C and Investment in the economy

, February 23, 2020, 1 Comments

income-tax-savings-marketexpress-inThe recently presented Budget by the finance minister for the financial year 2020-21 has puzzled income-tax payers guessing their tax liability. The new rates have also led to wide ranging discussions amongst policy makers from its macro- economic point of view. However, these proposed changes in income tax rates are applicable after March 2021 only.

The new tax structure (effective from financial year 20-21) proposed for resident Indians is as follows. Income up to ₹ 5 lakhs is tax- free, income between ₹5 lakhs to 7.5 lakhs is taxable at 5 per cent, ₹7.5 to ₹10 lakhs at 10 per cent, ₹10 lakhs to 12.5 lakhs at 15 percent, ₹ 12.5 lakhs to 15 lakhs at 20 percent and 30 percent beyond ₹15 lakhs.  However, the benefits of standard deduction, house rent allowance, deduction of interest on loan in respect of self-occupied residential house property, benefits under various sections such as 80C, 80D, 80TTA are not allowed under the new tax regime.

In contrast, the existing tax structure offers fewer income tax slabs, but higher tax rates. There is no need to pay any income tax if the income is up to ₹ 2.5 lakhs or the net taxable income is below ₹5 lakhs. Between ₹5 lakhs and ₹10 lakhs tax rate is 20 percent and beyond ₹ 10 lakhs, it is 30 percent. Nonetheless, the benefits under various sections of Income tax are allowed calculating the income tax liability. It may be noted that income beyond ₹ 15 lakhs is taxable at the rate of 30 per cent irrespective of scheme chosen by the taxpayer.   A taxpayer either can opt for the existing scheme or the new scheme in filing their income tax from next year onwards.

There are many advantages to choosing the new tax slabs. First, there will be the simplification in filing of income tax return (ITR). There is no need for professional experts in filing can be done even without any professional help in filing ITR. One has to fill the income in the tax form and the rest of the calculation will be done automatically.

Second, no additional data need to be furnished while claiming any income tax deduction.  The national pension scheme is of course an exception in this case. One can accordingly plan and calculate income tax liability in advance as calculations become easier without deductions. Finally,  there will be no need for maintenance of documents since no benefits are claimed while filing income tax. Maintaining proper documentation is still not a simple task for many of us.

This scheme will turn out to be quite beneficial for various sections of people who cannot invest fully to the limit set under 80C and 80D income tax sections. The youngsters, who do not earn enough and are unable to save and invest in the recommended fund options, can now reduce their income tax liability substantially. In case, an individual earns ₹15 but does not take advantage of any exemptions has to pay tax of ₹1.95 lakhs in the new scheme in contrast to ₹2.57 lakhs in the existing scheme, thus saving a substantial amount of ₹ 62.4k.  A taxpayer who is earning ₹15 lakhs (this figure is taken as beyond ₹15 lakhs, tax rates are no longer different from existing and new tax scheme) and availing benefits under 80C in full tend to save to the tune of ₹15600 a year in the new scheme. In addition, the benefits extend to those working people who have financial obligations towards their family in the near future.

Saving or investing in such schemes eligible for 80C deductions such as PPF, ELSS has a lock- in period of many years and therefore immediate available liquidity of funds is an issue for them.  They will pay less taxes in the new scheme and therefore can continue to fulfil their obligations in a better way. Similar benefits are also extended to older people who may not wish to continue with their long- term investments.

On the other hand, many of the employees reside in a reasonable size of houses and pay a good amount of rent and accordingly also take its benefit in income tax calculation. Similarly, awareness is on the rise nowadays towards higher health expenses. As a result, an increasing number of people are now opting for health insurance. Individuals claiming Standard Deduction, benefits such as HRA exemption, deductions under section 80C and 80D need to rethink twice while opting for a new scheme as it may lead to substantial out- go of income in taxes. The calculation shows that a person paying ₹30k per month towards rent and ₹50 k per year towards health insurance premium tends to lose nearly ₹80k per year if a new scheme is opted for. Thus, it is better to stick to old slabs if one has a home loan or has significant HRA deductions. Opting for a new scheme makes the taxpayer substantially poor. Shift to new slabs only if there is no home loan and no HRA.

Many stakeholders, on the other hand, are questioning the purpose behind withdrawing deductions in the new scheme of taxation.  In a country like India, insurance is an investment tool. And people not opting for insurance schemes under the new tax regime may hurt the growth of the insurance sector. Savings play a vital role in the growth of India’s GDP. Based on the figures, India’s GDP, savings rate as a proportion of GDP has fallen to 30% in 2018 from 35% in 2011. This trend is worrisome given India’s present economic condition.

Withdrawing exemptions under 80C, may therefore not attract people to save more preventing high level of investment in the economy. Furthermore, taxing dividends in the hands of taxpayers makes the capital market less unattractive. The disinvestment policy may also suffer as a result of this. It appears that it will be in the interest of the individuals and the economy if certain exemptions are restored in the new tax structure.


  • P V Rajeev Sebastian

    Was there a need to retain deductions at all. There should have been only one stream of income taxation without deductions