Budget 2020 – Personal Income Tax and tax simplification

Budget 2020 – Personal Income Tax and tax simplification

In order to provide significant relief to individual taxpayers and to simplify the Income-Tax law, the Finance Minister proposed to introduce a new and simpler personal income tax system in which income tax rates will be substantially reduced for individual taxpayers who forgo such deductions and exemptions.

The proposed tax-slab adjustments are listed in the table below:

Taxable Income Slab (Rs.)Existing tax ratesNew tax rates
0-2.5 LakhExemptExempt
2.5-5 Lakh5%5%
5-7.5 Lakh20%10%
7.5-10 Lakh20%15%
10-12.5 Lakh30%20%
12.5-15 Lakh30%25%
Above 15 Lakh30%30%

Surcharge and cess shall be continued to be levied at the existing rates.

In the new tax system, a taxpayer will gain substantial tax benefit, depending on the exemptions and deductions that he seeks. Thus its tax burden in the new regime will be reduced by Rs. 78,000. He would still be the gainer in the new regime, even though under the old regime he took deduction from Rs. 1.5 Lakh under various sections of Chapter VI-A of the Income Tax Act.

To individuals the new tax system will be free. An person currently benefiting from more deductions and exemptions under the Income Tax Act may choose to take advantage of them and continue to pay tax in the old regime.

The new rates for personal income tax would require foregone revenue of Rs. 40,000 crore per year. Measures were implemented to pre-fill the income tax return so that a person who opts for the new regime would not need an expert’s assistance to file their report and pay income tax.

The Finance Minister said that over the past several decades she has reviewed all exemptions and deductions that have been incorporated into the income tax legislation. The Income Tax Act currently provides more than one hundred exemptions and deductions of different character. In the new simplified regime, she said she has removed about 70 of them. She said that in the coming years, the remaining exemptions and deductions would also be reviewed and rationalized to further simplify the tax system and lower the tax rate.

Budget 2020 - Personal Income Tax and tax simplification

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