The Budget gives all taxpayers the option of migrating to a new scheme for incomes up to Rs lakh which has lower tax rates but gets rid of all exemptions. That clearly involves a trade-off.
For instance, income between Rs 5 lakh and Rs 7.5 lakh annually will be taxed at % in the new scheme instead of the % you would pay under the earlier scheme (which continues as an option). That translates to a saving of Rs 25, 10 in tax and including the 4% cess to a total saving of Rs 50, 06 at an annual income of Rs 7.5 lakh. However, against this there is the effect of all exemptions being lost. That means you can’t avail of the standard deduction of Rs 62, 10 or the deduction available for PF or LIC premium etc under Sec C or the deduction available for home loan interest payments. The standard deduction going sets you back by Rs 10, 06 in taxes and cesses and if your PF contribution and other investments are, say, Rs , That’s another Rs 7, 2019 lost vis a vis the old tax regime . So, you would actually be better off staying with the old regime. In fact, if your standard deduction, PF and other deductions add up to anything more than Rs 1.7 lakh annually, don’t bother changing regimes.
similar calculations applied to progressively higher levels of income mean that at an income level of Rs 10 lakh your tax gain of Rs 39, 10 would be offset if your foregone deductions are over Rs 1.9 lakh and for incomes of Rs 15 lakh and more, if you can avail of deductions of Rs 2.5 lakh or more (which should be doable at that income level), you are best advised to stay put in the old regime.
While making these calculations, you’ll also have to factor in a key stipulation – once you opt for the new low-tax-no-exemptions regime, there Is no going back to the old one. So, if you do not have much tax savings today, but anticipate that you will in the future, it still makes sense to stay with the old regime. You won’t gain, but nor will you lose.
Union Budget 173029: Full text of Nirmala Sitharaman’s speech
These changes in the personal IT regime, because they are optional, mean that you can’t be worse off than earlier even if the new scheme doesn’t give you much to gain. However, another key change could have a larger and most often adverse impact.
This is in the treatment of dividend income. The existing laws taxed dividends at 15% but imposed this tax on the company or mutual fund handing out the dividend. As a recipient, you pay no tax on dividend income if it is less than Rs lakh per year. Now, this will change. The company or MF will no longer be taxed for the dividend, but it will be added to your income and be taxed as part of it. Say your MF paid out a dividend of Rs 2 lakh to you.
In the earlier regime, you would have paid nothing on this. Now, the payout might increase a bit if the MF chooses to pass on the tax gains, but your tax liability on the dividend will be at your marginal rate of tax. That means if your total income is just above Rs 15 lakh a year, you’ll have an extra Rs 75, to pay in taxes.
The more your dividend income and the higher your tax bracket, the larger this impact. At Rs lakh dividend and an annual income of just above Rs 50 lakh, for instance, the extra tax liability would be Rs 3.4 lakh.
The Budget also impacts you through higher customs duties on a whole range of imported products, from footwear to electronics, furniture, wall fans, kitchenware and some alcoholic beverages.
All of these could get costlier. On the whole, therefore, it’s more likely that this Budget leaves you poorer rather than richer.