Individuals and HUF taxpayers will be able to pay taxable income at lower rates under a new regime introduced in Budget 2020 under section 115BAC. The new system will apply to revenue earned beginning April 1, 2020 (FY 2020-21), which corresponds to the fiscal year 2021-22.
In terms of tax planning, deciding on a tax regime at the start of the fiscal year is critical. A payer must compare the new tax regime’s income tax to the previous regime’s income tax. The investments and TDS or advance tax payable computations are made in accordance with the taxpayer’s choice of the tax system at the start of the year. In addition, if the taxpayer wishes to use the new tax regime, he or she must submit Form 10IE to the IRS before filing the return.
The New vs. Present Tax Regimes
At the start of FY 2020-21, a professional taxpayer can pick the alternative tax regime and notify their employer. During the fiscal year, the employee is unable to modify their mind. They can, however, change their minds when filing their tax return in July 2021.
The deadline to file taxes for the fiscal year 2020-21 is December 31, 2021. (extended from July 31, 2021).
If an employee does not elect the new tax system at the start of the fiscal year, the employer will withhold tax in accordance with the previous tax regime. As a result, a salaried taxpayer has the option of opting in and out each year. That implies you can select the new tax system one year and the conventional tax regime the following year.
When filing a tax return, a non-salaried taxpayer must select the new regime. During the year, they are not required to announce or inform anyone of their decision. Non-salaried taxpayers (those who earn money from a trade or business) cannot opt in and out of the new tax system on a yearly basis. If a non-salaried person opts out of the new tax system, they will not be able to opt in again in the future.
How to Save Income through the New Tax Regime
On account of several exemptions and deductions claimed, and the structure of these tax benefits varies widely from person to person, a ready-made comparable calculation chart cannot be provided to show which regime is more advantageous. However, when considering the tax benefits that the majority of taxpayers must withhold, the benefits of the current regime outweigh the advantages of lower tax rates obtained by migrating to the new regime.
For instance, Let’s start with the case of a regular employee. Since the vast majority of salaried employees either claim HRA for rent paid or, in all likelihood, have purchased a home with a home loan. If he bought a house with a home loan, he would have to go for home loan benefits for both Interest and principal payback for a total of 3.50 lakh, which includes Rs. 1.50 lakh for Section 80C principle prepayment and Rs. 2 lakh for home loan interest for self-occupied residential property.
He will have to sacrifice a deduction of Rs. 4,00,000 after accounting for the fact that he will have to forego the standard deduction of Rs. 50,000, resulting in a tax impact of Rs. 80,000 if his income is between Rs. 5 lakh and Rs. 10 lakh because he’s in the 20% tax band.
The net tax benefit forfeited under the new arrangement is greater than the tax obligation of Rs. 62,500. The tax effect of the dividend foregone at 30% would be 1.20 lakh for persons in the 30% tax band, compared to the tax savings of Rs—37,500 earned by switching to the new regime.
Eligibility under the Section 80TTB in the new tax regime
An elderly person who is a resident of our country is eligible for a deduction under section 80TTB. A senior citizen is a narrow concentration taxpayer who is over 60 years old at any point during the financial year. The 2018 Budget came in with the addition of Section 80TTB in new tax regime, and it became effective on April 1, 2018.
In the new tax regime, tax deductions and exemptions that are no longer accessible are as follows:
- Exemption from the leave travel allowance that is now offered to salaried individuals twice in a four-year period.
- HRA is a stipend that is generally paid to salaried employees as part of their pay. If the tenant was staying in rental housing, this might be claimed as tax-free up to specific restrictions.
- For employed taxpayers and pensioners, a mortgage interest deduction of Rs 50,000 is now provided.
- The deductions authorized under sections 80TTA/80TTB would no longer be available to taxpayers. As Sections 80TTA and 80TTB are covered by Chapter VIA, the new tax regime bans deductions under Chapter VIA, with a few exceptions. Thus, a person opting for the new tax regime will be ineligible to claim deductions.
- Section 16 provides for a deduction for recreation allowance and profession of tax.
- The interest that is paid on a home loan for a self-occupied or unoccupied house property is tax-deductible: Interest paid on a home loan for such a property might be deducted from the revenue from a house property that resulted in a loss. The loss could be offset against salary income, which will lower taxable income and lower net tax liability. This is covered in section 24.
- A deduction of Rs 15,000 from the family pension is allowed under Section 57, clause (iia).
- The most frequently claimed discounts under section 80C will be eliminated too. This is inclusive of the often claimed section 80C deductions for provident fund subscriptions, life insurance premiums, child’s school tuition fees, and different specified holdings such as ELSS, NPS, and PPF, among others.
- The deduction for a medical insurance premium that is claimed under section 80D will be lost as well.
- The Internal Revenue Code’s Sections 80DD and 80DDB prohibit the claim of disability benefits.
- Section 80E will prevent you from claiming a tax deduction on dividends accrued on a student loan.
- The tax credit for charitable contributions under section 80G will no longer be accessible.
Conclusion
Now you know that the new tax regime is beneficial after all. This is a great way that you can save income through this, and reduce your early expenses.
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