The parameters used to determine the individual’s tax liability can vary depending on type and amount of income, age, residence, investments, deductions by employer, etc. Individuals who earn an income are required to pay income taxes and these individual incomes are categorized into groups based on certain upper and lower limits. These categories of different tax payers are slotted into brackets or slabs. The amount of tax that they are liable to pay is determined by their allotted slabs. As a person’s income increases or decreases, they will fall into different slabs. Income at different levels or bands is taxed at different rates that are known as Income tax slab rates.
Tax Exemptions and Deductions
The Income Tax Act of 1961 allows individuals to avail of several tax exemptions and deductions that can help them to lower their tax burden. These exemptions are on House Rent Allowance (HRA), Leave Travel Allowance (LTA), interest from post-office savings accounts, investments in certain tax-saving instruments, etc.
Other tax-saving avenues include health insurance premiums, deductions on interest received in post-office/bank savings accounts held by certain age-groups, etc.
New Slab Rates For FY 2020-21
Under the existing system, there were only 4 basic slabs:
- Income: Upto Rs 2,50,000
- Income: Between Rs 2,50,001 – 5,00,000
- Income: Between Rs 5,00,001 – 10,00,000
- Income: Above 10,00,001
The annual budget of 2020 has introduced certain new slabs with reduced rates without 70 categories of exemptions and deductions. The basic exemption limit for individuals depends on her/his age and residential status. Individuals with net taxable income up to Rs 5 lakhs are eligible to Rs 12,500 rebate under both old and new taxation regimes.
The following two tables show the different rates pre- and post-Budget 2020-21.
|Annual Income||Slab Rates||Existing Tax Regime before Budget 2020||Slab Rates||New Tax Regime||Benefits in New Tax Regime|
** No tax up to Rs 5,00,000 taxable income because you can avail of rebate under Section 87A
The above table shows that under the new tax regime of Budget 2020 there are several changes. The new system is optional and will co-exist with the older version. The basic exemption income slab in the case of a resident of India aged 60 and above/80 and above continues to remain the same at Rs 3 lakhs and 5 lakhs respectively in the existing tax regime.
As many as 70 commonly used deductions and tax exemptions have been removed in Budget 2020 for salaried employees who choose to file under the new tax rate. Section 80C that refers to investments made in PF and NPS and Section 80D that refers to payments made as health insurance premium and the standard deduction of Rs 50,000 are proposed to be removed. But there is an important benefit that can still be claimed by those individuals who file under the new tax regime – Budget 2020 (AY 2021-22) has proposed a fiscal limit on the tax exemption contribution from employer account to the employee’s NPS account.