Budget 2020 – Optional Tax Rate Cut becomes the Talk of Town

In her second Union Budget, Finance Minister Nirmala Sitharaman significantly cut personal income tax rates, but in an interesting manner. If you want to avail of the new tax slabs proposed, you will have to forgo all the exemptions and deductions you have enjoyed under the old tax regime, under various Sections of the Income Tax Act.

First, let’s understand the change in the tax slabs :

Taxable Income Slab (INR lakhs per Annum)	Taxation under Old Regime	Taxation under New Regime
Under 2.5	Exempt	Exempt
2.5 – 5	5%*	5%*
5 – 7.5	20%	10%
7.5 – 10	20%	15%
10 – 12.5	30%	20%
12.5 – 15	30%	25%
Above 15	30%	30%

(* For incomes up to INR 5 lakhs, the tax payable is effectively exempt, given that you can avail of tax rebates up to INR 12,500)

Overall, it seems as if the tax rates have been cut, but the impact could be limited given the withdrawal of exemptions to avail lower tax rates. Individuals earning more than INR 15 lakhs will continue to pay 30% without any exemptions, while all individuals with income below INR 5 lakhs per annum will be exempt of tax in both the old and new regimes, given that you can avail of tax rebates of up to INR 12,500 if your total income is within this limit.

The FM also mentioned that of the nearly 100 tax exemptions and deductions currently allowed under the Income Tax Act, 70 have been removed.

Here are some of the exemptions and deductions you will have to stop availing if you desire the benefit of the new Income Tax slabs:

Deduction for Leave Travel Concession under Section 10
Deduction for House Rent Allowance
Standard deduction on income under Section 16
Deduction on interest paid on a loan for self-occupied/rented property
All chapter VI-A deductions (Sections 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA and so on)