New income tax rates: Will giving up HRA, LTA, Section 80C benefit you?

New Delhi: Union Finance Minister Nirmala Sitharaman announced a significant cut in the tax rates for the salaried class in her Budget speech, provided they forgo existing exemptions.

This also ushers in a new tax regime where the taxpayer has the option of taking new rates without exemptions or sticking to old rates with exemptions.

"In order to provide significant relief to the individual taxpayers and to simplify the Income-tax law, I propose to bring a new and simplified personal income tax regime wherein income tax rates will be significantly reduced for the individual taxpayers who forgo certain deductions and exemptions," the Finance Minister said in her speech as she proposed new income tax rates and slabs for those forgoing exemptions and deductions.

The new tax rates will be optional. Instead of actually simplifying, tax experts say that the dual tax rates might create confusion for individuals since they will have to calculate tax under both the regimes to see which is more beneficial.

Further, an individual will have an option to switch between the two rates on a year to year basis. But those with business income can only chose to switch once. These new income tax related proposals will come into effect from financial year 2020-21.

The popular deductions/exemptions that individuals under the new income tax regime will have to forego include LTA (Leave Travel Allowance), HRA (House Rent Allowance), interest on housing loan on self-occupied property, Standard Deduction and Chapter VIA deductions which include Section 80C, Section 80D among others .

Tax experts say that though the Union Budget focused on tweaking of personal tax rates in a bid to boost purchasing power and income of individuals, the introduction of new regime versus the old regime wherein the overall taxes have been reduced by scrapping of the major deductions such as LTA, 80C and HRA may not benefit the common man.

Under the new income tax rates, tax of only 10% will be charged for income of 5 lakh-7.5 lakh as against prevailing 20% rate. From 7.5 lakh-10 lakh income, a tax rate of 15% against 20% prevailing rate. For income 10-12.5 lakh, a rate of 20% will be charged as against 30% earlier.

For income between 12.5 lakh and 15 lakh will be taxed at 25% as against current levels of 30%. For those at 15 lakh plus income, tax rate will remain at 30%. The Finance Minister said a person earning 15 lakh per annum and not availing any deductions will now pay 1.95 lakh in tax in place of 2.73 lakh, a savings of 78,000, the finance minister said.

The tax experts say that Rs 78,000 is the maximum savings for an individual shifting to the new regime.

However, an individual may actually end up paying more tax on shifting to the new regime if the deduction and exemptions foregone are more than the savings under the new regime. Hence, it may require professional help.