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How to calculate income tax for FY 2020-21

From FY 2020-21, an individual taxpayer will have an choice to choose from existing and new tax regime. so as to understand which tax regime is useful for an individual, it's important to understand what proportion are going to be the liabilities in both regimes.

From April 1, 2020, an individual taxpayer will have the choice either to continue with the prevailing tax regime or choose the new tax regime sans 70 tax exemptions and deductions. Salaried individuals, having no business income, will need to choose from the prevailing and new tax regimes in coming fiscal year, as per their convenience.


On the opposite hand, those that have business income should carefully evaluate whether or not they want to continue with the prevailing tax regime or choose the new tax regime. This is often because once they choose the new tax regime, then they will switch back to the prevailing tax regime just one occasion during a lifetime.

To choose between the new and existing tax structures, it's important that you simply skills much are going to be your liabilities in both regimes.

AS per new tax slabs that are applicable within the new tax regime for people:

Surcharge is levied on income above Rs 50 lacs. Health and Education cess at the speed of 4 per cent are going to be added to the tax liability altogether cases. Individuals having taxable income of Rs 5 lakh are going to be eligible for tax rebate under section 87A up to Rs 12,500, thereby making zero tax payable within the new tax regime.
  • Under the new tax regime, an individual is eligible for only one deduction under section 80CCD (2). This section allows deduction on the employer's contribution to the NPS account for maximum of 10 per cent of the employee's salary (salary here means basic plus dearness allowance).
  • Other commonly availed deductions like those under sections 80C, 80D etc, and tax exemptions like HRA, LTA etc. aren't available within the new tax structure.
  • The calculation of tax that you simply are susceptible to pay under the new tax regime are often explained with an example. Suppose your total income in FY 2020-21 is Rs 16 lacs. Further, during the year, your employer has contributed Rs 60,000 to your NPS. which is eligible for deduction under section 80CCD (2). Therefore, your net taxable income are going to be Rs 15,40,000 (Rs 16 lakh minus Rs 60,000).
  • The tax liability within the new tax regime are going to be calculated on Rs 15.40 lakh. there'll be no tax on the primary Rs 2.5 lakh from Rs 15.40 lakh income. The income which remains chargeable to tax now left are going to be Rs 12.90 lakh (Rs 15.40 lakh minus Rs 2.5 lakh).
  • The next Rs 2.5 lakh (Rs 5 lakh minus the exempt Rs 2.5 lakh) from Rs 12.90 lakh are going to be taxed at 5 per cent. The tax amount here will be Rs 12,500.
  • The income left chargeable to tax are going to be Rs 10,40,000. Out of this, subsequent Rs 2.5 lakh (Rs 7.5 lakh minus Rs 5 lakh) are going to be taxed at 10 per cent. The tax amount comes bent be Rs 25,000.
  • Adding the liabilities from above points, the total liabilities comes to Rs 37,500 (0+12,500 + 25,000).
  • At this point, the income which remains chargeable to tax is Rs 7,90,000, Rs 2.5 lakh (Rs 10 lakh minus Rs 7.5 lakh) are going to be taxed at 15 per cent and therefore the liabilities is Rs 37,500.
  • After above points, the income for taxation is Rs 5,40,000, subsequent Rs 2.5 lakh (Rs 12.5 lakh minus Rs 10 lakh) are going to be taxed at 20 per cent. The liabilities comes bent be Rs 50,000.
  • The income left responsible for tax is Rs 2,90,000, out of this, Rs 2.5 lakh (Rs 15 lakh minus Rs 12.5 lakh) are going to be taxed at 25 per cent. The liabilities are going to be Rs 62,500.
  • Only Rs 40,000 is left which remains to be taxed. As per new tax slab, this may be taxed at 30 per cent. The liabilities are going to be Rs 12,000.
  • The total liabilities within the new tax regime comes bent be Rs 1,99,500 (0 + 12,500 + 25,000 + 37,500 + 50,000 + 62,500 + 12,000). Health and education cess are going to be added to the present at the speed of 4 per cent. The cess amount is Rs 7,980.
Therefore, in new tax regime, the entire liabilities are going to be Rs 2,07,480.

Now you're required to match this with the liabilities under the prevailing tax regime. The calculation of tax under the prevailing tax regime works during a similar way. First, you're required to deduct all the tax exemptions and deductions that you simply are eligible for from your gross total income then calculate your liabilities on internet taxable income (Click here to read more about it).

Another way to match between new and existing tax regimes is by checking what percentage deductions and/or tax exemptions that one must claim in order that liabilities is same in both the tax regimes.

As per calculation, under the prevailing regime, if a individual is in a position to save or claim deductions and tax exemptions of Rs 3,10,000 (Rs 50,000 plus Rs 2,60,000), then he/she will remain tax neutral in both regimes.

However, if the entire deductions and tax exemptions claimed by an individual is less than amount than Rs 3,10,000, then the individual should choose the new tax regime because it will involve lower liabilities.




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