Budget 2020: Nirmala Sitharaman bowls a googly on individual taxpayers; calculations made tricky, concessions offered with a rider

On 20 September 2019, Finance Minister Nirmala Sitharaman bowled a googly on the corporate sector. She announced steep corporate income tax rate cuts but with a rider—thou shall not claim any tax incentive or benefit. For some, the choice was between a rock and the hard place. Now she has done an encore—individual income tax rates would no longer be as steep as they were but once again this concession comes with a rider that individuals shall not claim any exemption or deduction too. And if they do, they will be taxed at the extant rates. Thus if a salaried person has gross total income (GTI) of Rs 7.50 lakh for the assessment year 2021-22, and avails section 80C and 80D to the hilt, he will have to make two computations and choose the one that is kinder to him. Under section 80C, let us say his contribution to recognised provident fund makes the grade for full deduction of Rs 1.5 lakh and under section 80D, he pays health insurance premium on his nuclear family as well as on his senior citizen parents thus qualifying for a deduction of Rs 50,000. [caption id=“attachment_4347785” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] Under the first option, he will have to forgo both these two tax deduction so that his GTI and total income are one and the same. On Rs 7.50 lakh, his tax liability would be Rs 12,500 (5 percent on Rs 2,50,000 after availing of the universal tax free limit of Rs 2,50,000) plus Rs 25,000 (10 percent on income in excess of Rs 5 lakh) thus making for a total gross tax liability of Rs 37,500. But if he wants to avail of the twin deductions, his total income would be Rs 5.50 lakh. In that his tax liability would be Rs 12,500 plus 20 percent of Rs 50,000 i.e. Rs 10,000 thus making for a gross tax liability of Rs 22,500. He would see merit in clinging onto the current rates. But at higher levels, the new rates may prove to be worthy of adoption. Let us say a salaried person has GTI of Rs 15 lakh and is entitled to section 80C and 80D deductions of Rs 1.5 lakh and Rs 50,000 to the hilt. At current rates, he will have to pay a tax on his total income of Rs 13 lakh of Rs 2, 02,500. But if he plumps for the new rates by sacrificing the twin deductions, his tax liability would be only Rs 1,37,500 (12,500+ 25,000+37,500+50,000+ 12,500). In other words, the making of tax rate less steep by carving out more slabs, benefits individuals at higher levels of income. The above two situations were oversimplified. In practice, the calculations and choice would be considerably complicated by the denial of following other significant benefits and exemptions if one opts for the new lower rates: (i) Leave travel concession (LTC) as contained in clause (5) of Section 10; (ii) House rent allowance (HRA) as contained in clause (13A) of Section 10; (iii) Some of the allowance as contained in Clause (14) of Section 10; (iv) Allowances to MPs/MLAs as contained in Clause (17) of Section 10; (v) Allowance for income of minor as contained in Clause (32) of Section 10; (vi) Exemption for SEZ unit contained in Section 10AA; (vii) Standard deduction, deduction for entertainment allowance and employment/professional tax as contained in Section 16; (viii) Interest under Section 24 in respect of self-occupied or vacant property referred to in sub-Section (2) of Section 23. (Loss under the head income from house property for rented house shall not be allowed to be set off under any other head and would be allowed to be carried forward as per extant law). Mercifully, non-business individuals can exercise their option every year i.e., whether to stick to the extant rates or the new ones. This is as it should be. As it is, the set-off of loss from house property on account of interest on self-occupied house is the most fecund tax planning tool for the salaried class. Now he will have to forgo this if he wants to avail of the new rates. How are very senior citizens going to be impacted? As it is they are completely exempt from tax on the first Rs 5 lakh and pay a 20 percent tax on income in excess of Rs 5 lakh but upto Rs 10 lakh. Let us take the case of a very senior citizen getting fixed deposit interest of Rs 5.50 lakh. After availing of deduction under section 80TTB, his total income is Rs 5 lakh on which he doesn’t have to pay any tax but if he were to choose the new rates, the excess over Rs 5 lakh i.e. Rs 50,000 would be taxed at the rates of 10 percent i.e. Rs 5,000. He would cling to the extant rates. But if he were to have interest income of Rs 7 lakh, under the extant regime, he would have to pay a tax of Rs 1.30 lakh after granting the deduction of Rs 50,000 under Section 80TTB benefit but if he were to opt for the new rates, he will have to pay just Rs 20,000. Sitharaman has made life difficult for individual taxpayers by making tax calculations complicated. For non-business individuals, the choice can be made every year afresh, one has to make two sets of calculations and see which one suits him better. The employer already burdened would be even more burdened in the face of the double calculations he will have to make for the purposes of tax deducted at source (TDS). (The writer is a senior columnist and tweets @smurlidharan) Follow full coverage of Union Budget 2020-21 here