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New income tax rate: Will giving up HRA, LTA, Section 80C benefit you?

The new tax rates announced in Budget 2020 will be optional


The maximum gain is ₹78,000 under the new income tax regime

"In order to provide significant relief to the individual taxpayers and to simplify the Income-tax law, I propose to bring a new and simplified personal income tax regime wherein income tax rates will be significantly reduced for the individual taxpayers who forgo certain deductions and exemptions," Finance Minister Nirmala Sitharaman said in her Budget 2020 speech as she proposed new income tax rates and slabs for those forgoing exemptions and deductions

The new tax rates will be optional. Instead of actually simplifying, tax experts say that the dual tax rates might create confusion for individuals since they will have to calculate tax under both the regimes to see which is more beneficial.

Further, an individual will have an option to switch between the two rates on a year to year basis. But those with business income can only chose to switch once. These new income tax related proposals will come into effect from financial year 2020-21.

The popular deductions/exemptions that individuals under the new income tax regime will have to forego include LTA (Leave Travel Allowance), HRA (House Rent Allowance), interest on housing loan on self-occupied property, Standard Deduction and Chapter VIA deductions which include Section 80C, Section 80D among others .

"The Union Budget announced by Finance Minister focused on tweaking of personal tax rates in a bid to boost purchasing power and income of individuals. However, the introduction of new regime versus the old regime wherein the overall taxes have been reduced by scrapping of the major deductions such as LTA, 80C and HRA may not benefit the common man but may burn a hole in his pocket," says Nitin Baijal, director at Deloitte.

Under the new income tax rates, tax of only 10% will be charged for income of ₹5 lakh-7.5 lakh as against prevailing 20% rate. From ₹7.5 lakh-10 lakh income, a tax rate of 15% against 20% prevailing rate. For income ₹10-12.5 lakh, a rate of 20% will be charged as against 30% earlier. For income between ₹12.5 lakh and ₹15 lakh will be taxed at 25% as against current levels of 30%. For those at ₹15 lakh plus income, tax rate will remain at 30%.

The finance minister said a person earning ₹15 lakh per annum and not availing any deductions will now pay ₹1.95 lakh in tax in place of ₹2.73 lakh, a savings of ₹78,000, the finance minister said.

Tax experts says ₹78,000 is the maximum savings for an individual shifting to the new regime. However, an individual may actually end up paying more tax on shifting to the new regime if the deduction and exemptions foregone are more than the savings under the new regime. Hence, it may require professional help.

Old/New income tax slabs

0 - 2.5 lakh - exempted - maximum cumulative gain zero

₹2.5 lakh - ₹5 lakh - 5% - maximum cumulative gain zero

₹5 lakh - ₹7.5 lakh - 10% (20% earlier) - maximum cumulative gain ₹26,000

₹7.5 lakh - ₹10 lakh - 15% (20% earlier) - maximum cumulative gain ₹39,000

₹10 lakh to ₹12.5 lakh - 20% (30% earlier) - maximum cumulative gain ₹65,000

₹12.5 lakh - ₹15 lakh - 25% (30% earlier) - maximum cumulative gain ₹78,000

No change in tax rates above ₹15 lakh

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