Budget 2020 and Its Impact on Your Personal Finance - Outside View by PersonalFN

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Budget 2020 and Its Impact on Your Personal Finance
Feb 3, 2020

The much-awaited Union Budget 2020 (applicable for the financial year 2020-21) was articulated today by Finance Minister, Ms Nirmala Sitharaman in the Lok Sabha. As expected, the fiscal deficit target was hiked to 3.8% of GDP in order to boost "macroeconomic stability".

The Budget provided further reforms to stimulate growth, simplify the tax structure, bring ease of compliance, and reduce litigations.

Here are some the key highlights from the point of view of individual taxpayers:

The FM announced that depositors' money in scheduled commercial banks is completely safe. The insurance limit under the Deposit Insurance and Credit Guarantee Corporation (DICGC) is proposed to be increased to Rs 5 lakh from Rs 1 lakh at present to protect depositors' interest.

The Budget also addressed India Inc.'s long-pending demand to abolish Dividend Distribution Tax (DDT). DDT will now be only taxed in the hand of investors by adding to their total income. This will benefit individual taxpayers -- especially those who are actually liable to pay less tax (due to the tax slab applicable) instead of the current effective DDT rate of 20.36%. The removal of DDT is estimated to result in an annual revenue loss of Rs 25,000 crore for the exchequer. The move is expected to make India an attractive destination for investment.

A major revamp of the personal income tax slab front is also proposed in the Union Budget 2020. Taxpayers will now have the option either to remain in the existing tax regime or opt for a lower tax regime but subject to certain conditions. If the taxpayer decides to opt for a lower tax slab, he/she will have to forego any relief and tax exemptions.

This means that if you opt for the new tax regime, you will have to forgo some of the common and popular deductions/ exemptions such as LTA, HRA, and deduction under chapter VI-A (80C, 80D, 80E, 80G, etc.)

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As an individual, you will have to do your own assessment to determine which tax regime will be more beneficial to you.

Table 1: The new tax regime offers the taxpayer the option to opt for a lower tax rate

Income slab (Rs) Tax rate (existing) Tax rate (w/o exemption)
Upto 2.5 lakh Nil Nil
2.5-5 lakh 5% 5%
5-7.5 lakh 20% 10%
7.5-10 lakh 20% 15%
10-12.5 lakh 30% 20%
12.5-15 lakh 30% 25%
Above 15 lakh 30% 30%
(Source: indiabudget.gov.in)

If you are an individual belonging to the middle-income group i.e. earning an income of up to Rs 10 lakh, the new tax regime can provide major relief.

However, if you are earning over Rs 10 lakh the older regime could be more beneficial to reduce taxable income by way of the available exemptions and deductions.

Table 2: Will the new tax regime reduce your tax outgo?

Old Tax Regime New Tax Regime
Gross Income 10,00,000 10,00,000
U/Sec: 80C 1,50,000 -
U/Sec: 80D 25,000 -
U/Sec: 24(b) 75,000 -
Taxable Income 7,50,000 10,00,000
Tax Slab (OLD)
0 to 2.5 Lacs - -
2.5 to 5 Lacs @ 5% 12,500 -
5 Lacs to 10 Lacs @ 20% 50,000 -
> 10 Lacs @ 30% - -
Tax Slab (NEW)
0 to 5 Lacs - -
2.5 to 5 Lacs @ 5% - 12,500
5 to 7.5 Lacs @ 10% - 25,000
7.5 Lacs to 10 Lacs @ 15% - 37,500
10 Lacs to 12.5 Lacs @ 20% - -
12.5 Lacs to 15 Lacs @ 25% - -
> 15 Lacs @ 30% - -
Income Tax 62,500 75,000
Cess @ 4% 2,500 3,000
Total Tax Outgo 65,000 78,000
(Source: PersonalFN research)

Consider this illustration, if are earning an incoming up to Rs 10 lakh without utilising the full limit available for deductions/exemptions, then you would be better off opting for the new tax regime as your tax outgo will be lower. However, if your income is above Rs 10 lakh and you are availing full deduction/exemption under Sec 80C, 80D, interest on housing loan, etc. then opting for the old tax regime would be more beneficial.

Ms Sitharaman announced that the additional benefit/deduction of Rs 1.5 lakh or interest paid on 'affordable housing' loan, which was allowed housing loans sanctioned on or before March 31, 2020, be extended for one more year i.e. till March 31, 2021, for home buyers.

The new personal income tax rates will entail estimated revenue forgone of Rs 40,000 crore per year for the exchequer.

Further, Ms Sitharaman assured that taxpayers will not face any harassment from the taxman. For this purpose, the government is committed to bringing in transformational changes so that maximum governance is provided with minimum government. In order to impart greater efficiency, transparency and accountability to the assessment process, a new faceless assessment scheme has already been introduced.

Union Budget 2020 hopes to boost income and enhance the purchasing power of individuals. Now it remains to be seen if that boost consumption and successfully takes India on the path to achieving the USD 5 trillion economy dream by 2024-25.

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Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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