I remember my friend Rohan (the last one from my college group who got married just last year) and his happiness when he announced (in May 2019) that he was going to get married in December 2019. Initially, for him, it was like he just couldn’t wait for these months to get over and be married. And then on the penultimate day of his marriage, suddenly, I found him developing cold feet. Rohan was not sure whether he was (still) prepared for marriage or not – can you imagine this?? We (his other batchmates) were celebrating the first decade anniversary of our respective marriages and here goes Rohan who thinks he’s still early. Finally, when he turned to me to share my experience, I just had one sentence for him – Just do it and experience the journey for yourself. Although I could have given him loads of gyaan (some self-acquired and some borrowed), I refrained myself as it was important for him to first start and then understand his own adventure and thrill-filled journey, otherwise commonly known as the ‘married life’.
If you have taken a second off to read the title again, don’t be surprised! This article is not about the secrets of a happy married life but is about how to help your salaried clients choose between submitting their declarations for the ‘Old’ OR ‘New’ regime to their employers. So, when the announcement came in February 2020 about the New regime, it caught many people’s fancy as the slabs and the corresponding rates definitely seemed lower than what people were paying now. But then came the catch – the New regime required its adopters to let go of all their exemptions and deductions.
The Budget (and subsequently the law) was clear that every individual need to take this decision before their return for FY 2020-21 was filed. But then arose the practical difficulty in the first week of April, when employers are required to draw up the estimates for the whole year’s salary and deduce the TDS on the same. On 13th April, CBDT came up with a circular to clarify that employees need to furnish their declaration of opting for the Old or the New scheme to their employers at the start of the year, purely for the purpose of calculating the TDS on their salaries. Since then, many companies have sent email communications to their employees asking them to submit their declarations for the Old or New regime. And now when these individuals turn to their financial advisors for help on this, how do you help them decide?
Now is the time to make the real decision, how does one go about it? There is an only sure-shot way to decide on this — prepare a statement of computation of total income for the year 2020-21 and calculate your tax liability on the same, both under the Old and New regime. At the end of this statement, whichever column shows you lower taxes, go for it. I would like to caution here that results will (and not may) vary for every individual here. It is best to not rely on a straight-jacket formula to make this decision.
To understand this situation practically, let's look at how the calculation and comparison work out for three different cases on the same salary chart.
Case 1 looks at the tax computation and comparison for the individual, who is claiming exemption benefits under HRA, LTA and deductions for a home loan, section 80C and 80D and standard deduction.
Case 2 looks at the tax computation and comparison for the same individual, who is claiming exemption benefits under LTA and deductions for a home loan, section 80C and 80D and standard deduction.
Case 3 looks at the tax computation and comparison for the same individual, who is claiming deductions under section 80C and standard deduction.
The table below can be used as a reference point to understand how the comparison actually works for each of the above 3 cases:
I want to emphasize here again that this table cannot be used as make thumb-rules for decision points. So many other combinations are possible here, to enumerate a few, deductions claimed for NPS and interest paid on education loans, rental income earned on let-out properties, substantial interest income earned on investments, etc. Or dozens of combinations with this list.
Once the individual’s salary computation and resulting tax position been worked out, the results will help decide which regime to choose. For advisors who find it difficult to calculate the tax on income, there is help available on the website: https://www.incometaxindiaefiling.gov.in/Tax_Calculator/index.html?lang=eng where they can input the total income (before exemptions and deductions) and the total exemptions and deductions separately and the website will show the comparison (and benefit) under the two regimes.
An interesting point to note here is that this declaration to the employer (by the individual) is not the ultimate decision point, the circular (13th April) states that though the employee cannot change his declaration once done, he/she (as a tax filer) can still decide and take the final decision before the filing of returns. In other words, the individual may have opted for the new regime at the start of this financial year, but he can still opt for the old regime before he files his return of income next year.
To conclude, in case your clients have already made their choice with the regimes and you later find out (with the help of this exercise) that the decision was not right, you can always educate them (and remind them) about the Final Call to be taken next year before they file taxes.
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