In the wake of nationwide lockdown for dealing with coronavirus pandemic, India’s Finance Act has recently received the Presidential assent on March 27, 2020, within it contains the new tax regime for Financial Year 2020-21 (FY2020-21), which would be incorporated in the Income-Tax Act 1961. In this regard, the Central Board of Direct Taxes had already issued the circular detailing the process on April 13 for employers to follow while deducting taxes from April onwards. This new-tax regime first proposed in Union Budget 2020 as a new, simplified tax regime under which taxpayers can benefit from reducing tax liabilities.
Up until now, the investors strategically allocate their income into specified tax-saving investment products like PPF, NPS, ULIPs, Tax-Saver FDs, ELSS, NSCs etc. to claim the deductions of Rs. 1.5 lakh under Section 80C of Income Tax Act 1961. As per new tax-regime, the investors will no longer claim deductions under 80C but will be free to make investments according to the financial goals without bounded to tax-savings. Also, it will put an end to the hassle of filing complicated ITR forms.
Now the question is, “Will switching to the new tax regime will benefit investors or not?”
But, before we move any further let’s take a look at the illustrative table of New Vs Old Tax-Regime.
New Vs Old Tax-Regime
| Annual Income | Tax Liability in Rupees (excluding surcharge and education cess) | ||||
| As per new tax regime | As per existing tax regime* | Benefit as per the new tax regime | |||
| Slab Rates (%) | As per new tax regime (No deduction/exemption available) | Slab Rates (%) | As per the existing tax regime (deduction/exemption available, but not considered) | ||
| 2,50,000 | – | – | – | – | – |
| 5,00,000 | 5%** | – | 5%** | – | – |
| 7,50,000 | 10% | 37,500 | 20% | 62,500 | 25,000 |
| 8,00,000 | 15% | 45,000 | 20% | 72,500 | 27,500 |
| 10,00,000 | 15% | 75,000 | 20% | 1,12,500 | 37,500 |
| 12,50,000 | 20% | 1,25,000 | 30% | 1,87,500 | 62,500 |
| 15,00,000 | 25% | 1,87,500 | 30% | 2,62,500 | 75,000 |
| 50,00,000 | 30% | 12,37,500 | 30% | 13,12,500 | 75,000 |
| 75,00,000 | 30% | 19,87,500 | 30% | 20,62,500 | 75,000 |
| 1,00,00,000 | 30% | 27,37,500 | 30% | 28,12,500 | 75,000 |
| 1,50,00,000 | 30% | 42,37,500 | 30% | 43,12,500 | 75,000 |
| 2,00,00,000 | 30% | 57,37,500 | 30% | 58,12,500 | 75,000 |
| 3,50,00,000 | 30% | 1,02,37,500 | 30% | 1,03,12,500 | 75,000 |
| 5,00,00,000 | 30% | 1,47,37,500 | 30% | 1,48,12,500 | 75,000 |
| 5,50,00,000 | 30% | 1,62,37,500 | 30% | 1,63,12,500 | 75,000 |
Will New Tax-Regime Benefit Investors? – Explanation
As you know up until now, the investors with taxable income were bound to invest in tax-saving investment options to benefit from exemptions of Section 80C under IT Act 1961. As a result, many investors had to invest in tax-efficient but inefficient low-return investment options which were slowing down their wealth creation goals and even slowly eroding their wealth during the inflation period.
For instance, with the existing tax-regime, an investor invested in a tax-saving FD which advertises an interest rate of 6.5 per cent per year. If you are falling in the bracket of 30 per cent, the post-tax-returns from your investment made in FD will be just near 4.55 per cent. And if the inflation rate is at 5 per cent for the year then you would be lost 0.45 per cent of your money which you were keeping in FD.
Instead, if the investor invested directly in equities can benefit from the high, inflation-adjusted returns overtime. However, there would be major risks involved but over the long-term, the equity comes out as a better investment option that can help you in achieiving your future financial goals. With the new tax regime, the investors who were once bound to invest in tax-saving schemes will now have the flexibility of customizing the investment option on their own.
But, that’s the ideal scenario!
It has often seen that many people un-willingly invest in such tax-saving schemes because they want to save their taxes not because they are interested in building wealth for their future sake. With the increased liquidity, the investors will be tempted to spend more leading to less saving than before. The earlier tax-regime not only helped to get a deduction for tax-saving but also lead to household savings. But, with the arrival of new tax-regime, it could change the entire scenario drastically. What this means is that investors who were investing in tax-saving schemes will get the upfront gain in their taxation, risk losing much-higher returns that they would have otherwise received from the investments they made.
So, the lower household saving will not only jeopardize investors long-term plans but also lead to weak GDP growth. With the introduction of the new tax regime, the rates of savings could further declined. In short, we can say that the new-tax regime holds less scope for future savings and wealth growth.
Final Thoughts: –
In light of the above and considering the new tax regime, there is no doubt that investors who once were retricted to invest in inefficient investment options to claim tax deductions under 80C will now have the leverage to decide the investment options on their own. However, it would be advisable to do a comparative evaluation under both before opting to continue with the existing one or opting for the new regime.
Rest assured, the new tax-regime is optional and anyone can exercise this option at the time of filing income tax returns. But, be sure to take that decision in the beginning because if you decide to continue with the existing one then you won’t be able to get certain exemptions like LTA.