The new lower Income tax rate is just an eyewash.

 

In February 2020, when the Finance Minister of India announced the reduction in Income tax rates of Individuals & HUF  by the introduction of section 115BAC, the individual taxpayers assume that this new section will reduce their tax burden from the financial year 2020-21. However, when a fine print of the law was published, this taxpayer was confused as to how there is a reduction in their tax cost from the new lower tax rate. 

 

The benefit of the reduced tax rates is available only when the taxpayer forgoes all their exemptions & deductions. These exemptions & deductions are most commonly available deductions and the taxpayer actually has nothing to do extra to get all these exemptions & deductions. For example, standard deductions of Rs.50,000/-, deductions of Rs. 150,000/- under section 80C which mainly includes mandatory payment like, provident fund, school fees, Life Insurance, Home loan repayment etc, deductions for health insurance, House rent allowance for rent paid to the landlord, Interest on loan for self-occupied residence, etc.  Therefore it is very unlikely that taxpayers who are availing all these exemptions and deductions will get benefit from the new tax rate.

 

Further, Individual taxpayers have the choice to select between old and new tax rates and hence to do the correct selection, the taxpayer is required to first compute correct tax liability under both the tax rates and then only can decide which is beneficial to him. Thus, the process of computing income tax liability for individual taxpayers is more stressful & cumbersome.    

 

Also, the salaried individual taxpayers who are subject to  TDS, are required to inform their employer at the beginning of the year about their preference of tax rates and there is no option to change their preference during the financial year. Thus, these salaried taxpayers have been imposed with an additional burden to be extra cautious while intimating the employer regarding availing the option of tax rates.  The new tax rates are only beneficial to the taxpayer who doesn’t have any option to claim any deductions or exemptions.

 

Thus, complexities of exercising and evaluating the option itself make the change onerous for the taxpayer. Further, the scope of availing the exemptions and deductions are vast, it’s very unlikely that taxpayers will select a new tax rate and hence it can be concluded that new tax rate is just an eyewash.