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Budget FY 2020-21 – Tax on Salary

The Union Budget for FY 2020-21 was tabled in the Parliament by the Finance Minister of India on 01-Feb-2020. Here are the key proposals related to computation of tax on salary which payroll managers need to consider for FY 2020-21, effective 01-Apr-2020.

Introduction of lower tax slabs

The Finance Minister has introduced Section 115BAC, which allows employees to opt for lower tax rates subject to their foregoing certain exemptions/losses/deductions. In case, an employee wishes to claim deductions/exemptions, the existing tax rates and slabs will continue to apply.

The tax slabs under the new regime and the current regime are as follows.

How should an employee make the choice between the current and the new tax slabs?

Let us assume that an employee’s gross salary is Rs 12,60,000 per annum. If the employee does not seek deductions/exemptions, their taxable salary shall be Rs 12,60,000 and hence they would fall under the 25% slab in the new tax regime (see the above table) as against the 30% bracket in the current tax slabs. In this case, the employee is better off choosing the new tax regime.

In case the employee is eligible to avail, say Rs 3,00,000 in tax benefits by way of exemptions/deductions, their taxable salary under the old regime shall be Rs 9,60,000, which falls under the 20% bracket in the old regime. Hence, the employee, in such a case, is better off choosing the old regime.

Employees, after considering their gross salary and the available exemptions/deductions, should calculate their total tax liability under both regimes and choose that which would be beneficial to them.

Benefits which are not available under the new tax regime

In case an employee opts for the lower tax rates, the below exemptions and deductions will not be available (as per section 115BAC) for consideration while computing the taxable income.

1. House Rent Allowance exemption under section 10(13A).
2. Tax exemption for Leave Travel Assistance available under section 10(5).
3. Deductions under Chapter VIA – this includes section 80C deductions such as life insurance premium payments, which are among the most availed by employees. Deduction in respect of employers’ contribution to NPS under section 80CCD(2) is available under the new tax regime.
4. Specific allowances under section 10(14) to be prescribed by the Income Tax Department.
5. Standard deduction and professional tax deduction under section 16.
6. Housing loan benefit – Interest paid on housing loan under section 24(b) on self-occupied property and losses under the head “house property”.

Employees need to exercise the option between the current tax regime and the new tax regime prior to filing their return for the year. In case an employee has business income, then the employee should stick to the tax regime they opt for until the year they cease to have business income.

Please request your employees to specify their choice with regard to the tax regime they wish to be considered under and deduct tax on their salary accordingly.

Section 80EEA – First time home buyer

The benefit of Rs 1,50,000 on interest payment towards housing loan taken by first home buyers is now available for loans sanctioned until 31-March-2021.

TDS in case of no PAN

Section 206AA has been modified to 5% instead of 20% in case of an employee not furnishing the PAN.

Modification to Section 17

Any amount or the aggregate of amounts of any contribution, in excess of Rs 7,50,000, made to the account of the employer by the employer–– (a) in a recognised provident fund; (b) in the scheme referred to in sub-section (1) of section 80CCD; and 10 (c) in an approved superannuation fund, shall be considered as taxable income.