This year’s budget has announced significant changes to income tax slabs with the disclaimer that tax-payers availing of the new tax slabs will have to forgo tax exemptions that they previously availed of. Alternatively tax-payers can continue to avail of exemptions, but will not be able to avail of the new tax slabs. For the average salaried tax-payer, this translates to a choice between two investment paths related to tax planning.

Option 1: Avail of the new income tax slabs

Finance Minister Nirmala Sitharaman announced in Budget 2020 that individual tax-payers could opt for a new system of taxation with reduced income tax rates. For the middle income group the new tax slabs spell good news. Here are the details:

  • – Up until an annual income of INR 250,000 no income tax is payable
  • – Individuals with an annual income of INR 250,000 to INR 500,000 will need to pay 5% income tax
  • – For individuals earning between INR 500,000 and INR 750,000, a 10% tax is applicable
  • – Individuals earning between INR 750,000 annually and 10 lakhs will need to pay 15% tax on their income
  • – Individuals who take home INR 10 lakhs to INR 12.5 lakhs will need to shell out 20% income tax
  • – Similarly those earning INR 12.5 lakh to INR 15 lakh will need to shell out 25% of their income on income tax
  • – Individuals earning anything in excess of INR 15 lakh unfortunately will not be seeing any reduction in their income tax burden. They will have to put down a sizable 30% of their income towards income tax in 2020 as they have done previously.

Tax-payers who want to avail of the new tax slabs will however need to forgo certain tax exemptions and deductions, some of which are as follows

1. Exemptions:

House Rent Allowance

Leave Travel Allowance

2. Deductions:

Provided Fund (PF)

Public Provident Fund (PPF)

Tax saving investments under 80C, 80D, 80EE

Additionally, tax-payers who choose to avail of budget 2020’s new tax slabs will not be able to claim deductions against losses from house property.

You should certainly weigh these considerations while tax planning in 2020. For instance if you often are not able to show sufficient investments to claim deductions 80C then you will pay less tax by opting for the new tax slabs as compared to the amount of you will need to part with it you stick with the old tax regime.

Tax-payers who opt for investments that do not qualify for deductions could also benefit from choosing to avail of the new tax slabs. If you prefer to grow your income by playing the stock market for instance, you could opt for the new tax slabs. A good place to start is by downloading the Angel Broking trading app.

A word of caution: As tempting as it seems, it is not advisable to use the new tax slabs to avoid or reducing investing in 2020. Tax planning should ideally be used to ensure more investments and not vice versa.

Option 2: Stick with the old tax regime

Budget 2020 also allows tax-payers to stick with the status quo – tax-payers who choose to continue paying the heavier taxes under the old tax regime will continue to benefit from tax exemptions and deductions.

If you choose to go with this option you will continue to pay taxes as follows:

  • – Individuals with an annual income of INR 500,000 to INR 750,00 pay 10% income tax
  • – Annual income between INR 750,000 and INR 10 lakh is taxed at 15% income tax
  • – Annual income between 10 lakh and 12.5 lakh is taxed at 20%
  • – Those earning between 12.5 lakh and 15 lakh pay 25%
  • – Those earning anything above 15 lakh pay 30% income tax either way

If you decide to stick with the old tax regime, it is absolutely imperative that you invest smartly in order to grow your money while also reducing your tax burden. There are several options on the market such as: mutual funds specifically equity-linked saving schemes, Unit-linked insurance plans and life insurance.

Alternatively you can avail of tax deductions if you  have signed up for a home loan or an educational loan for a child. Income tax deductions can also be availed of against medical and health insurance plans purchased.

Conclusion:

Consider all the factors discussed in this guide carefully before choosing which income tax regime you will go with. If you are in the annual income of over 15 lakh bracket, your tax burden will not change either way but for the rest of tax-payers your choice will determine how much you save on tax this year. Now might be an opportune moment to change from traditional investment methods to stocks. Identify your stock options and read up on how to navigate the stock market on the Angel Broking app for example. If you’re sitting on the fence it is crucial to know that you can make a choice and determine if it works for you this year and accordingly change or stick with your choice next year.