Understanding Income Tax Brackets for FY 2020-21

By admin | Jun 11, 2020

In India, income tax is levied on individual taxpayers based on a slab system. Each slab has different tax rates that keep increasing with an increase in the income slab. In addition to the tax slabs, there are three categories for individual taxpayers:

  • Individuals (below the age of 60 years), which includes residents as well as non-residents

  • Resident senior citizens (60 years and above but below the age of 80 years)

  • Resident super senior citizens (above 80 years of age)

With the budget announcement of February 2020, the Finance Minister introduced a more complicated slab system for taxpayers, where one has the choice of continuing with the old tax regime or moving to the new tax regime. 

While both these regimes come with their own set of benefits, the choice that an individual taxpayer has to make is not straightforward and will require analysis of the cost-benefits before deciding whether to continue with the old regime or move to the new one. 

 

4 Slab Old Regime

Under the old regime, there are essentially four income slabs and basic tax rates. The following table shows the tax rates for taxpayers below the age of 60 years.

 

Income Tax Slab Tax Rate
Up to Rs 2.5 lakh NIL
Rs 2.5 lakh to Rs 5 lakh 5%
Rs 5 lakh to Rs 10 lakh 20%
Above Rs 10 lakh 30%

 

7 Slab New Regime

Under the new regime, there are seven income slabs and basic tax rates. The following table shows the tax rates for taxpayers below the age of 60 years.

 

Income Tax Slab Tax Rate 
Up to Rs 2.5 lakh NIL
Rs 2.5 lakh to Rs 5 lakh  5%
Rs 5 lakh to Rs 7.5 lakh 10%
Rs 7.5 lakh to Rs 10 lakh 15%
Rs 10 lakh to Rs 12.5 lakh  20%
Rs 12.5 lakh to Rs 15 lakh 25%
Rs 15 lakh and above   30%

 

 

Which one should you opt for?

While the new regime has lower tax rates, opting for it will mean you will have to forgo the benefits of most deductions, including Sec 80C (annual investments, expenses, life insurance premium up to Rs 1.5 lakh), Section 80D (health insurance premiums), Section 24 (interest on home loans), Section 80E (educational loan interest), and Section 16 (standard deduction on salary income). 

Under the new regime, you will also have to forgo the benefits of most exemptions under Section 10, such as house rent allowance and leave travel concession.

Only a handful of deductions and exemptions are allowed in the new regime. These include employer contribution towards employee NPS, transport allowance to Divyang (specially-abled) employees, and conveyance allowance for office duty expenses. 

 

In short, an individual will now have a choice between higher tax rates with the benefits of most deductions and exemptions, and lower tax rates with almost no deductions and exemptions. You will also be able to continue with the old regime for now and choose the new one in the future. If you have no business income, you can choose between the old and the new regime every year. 

But if you have a business income or are self-employed, once you make the choice to switch to the new regime, you can switch back to the old regime only once again if you wish to. And there will be no choice beyond that in future years. You will, however, have the option to choose every year if your business income ceases to exist and you become a salaried individual. 

 

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