The Benefits and Pitfalls of the Income Tax Slab for FY 2019-2020 in India
The fiscal year 2019-2020 brought significant changes to India's tax regime, particularly in terms of the income tax slab. This year, the introduction of new income tax slabs has both its benefits and disadvantages, depending on the individual's investment and financial situation.
Advantages of the New Income Tax Slab
For individuals who are investing for deductions and exemptions, the new tax slab offers several advantages. If one is already maximizing their tax deductions, particularly through the 80C route, and does not have any Fixed Deposit (FD) interest income, the new slabs are beneficial. Here are the key points:
1. Preservation of Old Tax Regime: If you are already utilizing the old regime to benefit from tax deductions and exemptions, you can continue doing so. This means you won't face an increase in your tax liability under the new system.
2. Potential Savings for Non-Investors: For individuals who are not making investments for tax deductions and exemptions, or who lack the funds or ability to maximize these benefits, the new slab rates may lead to a reduction in overall tax outgo.
Disadvantages of the New Income Tax Slab
While the new tax slab can bring temporary savings, it also comes with significant drawbacks. Here are some of the key challenges associated with the new system:
1. Complexity in Tax Calculation: You will need to calculate your tax liability under both the old and new slabs to determine which one is more favorable. This process can be complicated and time-consuming, especially if you are considering changing your investment strategies.
2. Loss of Deductions: The new regime does not offer the same level of tax deductions as the old system. Therefore, if you were relying on these deductions, switching to the new regime might not be cost-effective. Additionally, you may need to reevaluate your investment portfolio to ensure it aligns with your financial goals rather than just tax benefits.
3. Potential Implications for Future Savings: The new tax slabs may encourage a behavior of not saving for the future, such as not contributing to superannuation funds or purchasing medical insurance premiums. While investments can still provide returns, the primary focus under the new regime should be on generating income rather than saving for tax benefits.
The Government’s Perspective
The move towards the new income tax slab has been met with criticism, especially regarding the government’s expectation of a reduction in tax revenue of 40,000 crore rupees (approximately $5.23 billion). In a state of economic slowdown and a fiscal deficit, this reduction in tax revenue is seen as a negative step. This stance was met with protests from various quarters, including notable think tanks and consulting firms like Quirky Consultants, who argue that the government's attempt to simplify the tax system was misguided.
In the words of Quirky Consultants, the government believes it can fool the 133 crore population with its tax reforms. However, the Consultants' perspective is that this approach has been highly suspect. Instead of reducing tax revenue, the move may lead to a disengagement of individuals from tax-saving investments, leading to long-term negative consequences for the economy.
Practical Tips for Investors
To navigate the new tax slab effectively, consider the following practical tips:
1. Understand Your Tax Thresholds: If your taxable income is below Rs 5 lakh (approximately $6,300), you do not have to pay any income tax. Therefore, try to keep your income as close to Rs 4.99 lakh as possible to avoid tax liability.
2. Evaluate Your Investment Strategy: If you decide to switch to the new system, reassess your investments to ensure they align with your long-term financial goals rather than just tax benefits. For instance, if you have investments in FDs, consider alternatives that may provide higher returns while still offering tax-saving benefits.
3. Seek Professional Advice: Given the complexity of the new tax slab, it may be wise to consult a tax expert or financial advisor to ensure you are maximizing your benefits while minimizing potential risks.