Union Budget 2020 has introduced an optional tax regime aiming to simplify income tax for individual taxpayers. The new regime offers an option to pay tax at reduced tax rates, for the income bracket between Rs 5 lakh and Rs 15 lakh, in comparison to the existing regime. However, keeping in mind the simplification of tax, the new regime withdraws 70 deductions and exemptions.

The optional new regime will be available for the financial year beginning the 1st of April 2020 (FY 2020-21), and taxpayers are evaluating whether the regime would be beneficial to them.

Reduced income tax slab rates: The slab rates of 20% and 30% have been replaced by staggered slab rates from 10% to 25% for incomes from Rs 5 lakh to Rs 15 lakh. However, the basic exemption limit for the individuals remains the same at Rs 2.5 lakh in a financial year. The reduced tax liability and tax savings under the new regime are depicted below:

Annual income Tax(existing regime) Tax under new regime Tax savings (new regime)

Up to Rs 7.5 lakh 65,000 39,000 26,000
Up to Rs 10 lakh 117,000 78,000 39,000
Up to Rs 12.5 lakh 195,000 130,000 65,000
Up to Rs 15 lakh 273,000 195,000 78,000

As seen in the table above, an individual earning Rs 12.5 lakh can save taxes up to Rs 65,000 under the optional new regime. However, the taxpayers will have to give up 70 exemptions and deductions if they opt for the new tax regime.
A taxpayer having taxable income up to Rs 5 lakh does not have to pay tax both under the new regime and existing regime. Such taxpayer can claim the rebate under section 87A for taxable income up to Rs 5 lakh.
Simplification of income tax law: Another benefit that the new tax regime will provide is the simplification and easing of income tax law. Under the existing regime, the taxpayers can claim exemptions such as house rent allowance (HRA), leave travel allowance (LTA), children education allowance (CEA) and deductions such as LIC premium, health insurance premium, interest on housing loan of a self-occupied property.
A taxpayer wishing to claim all or any of the above exemptions and deductions has to calculate the same, obtain the necessary proofs and make a claim for deduction while filing their income tax returns. The process is tedious and requires retention of proofs at the end of the taxpayer.

???In the above example, a taxpayer who makes tax-saving investments and incurs expenses on rent and medical insurance can file an income tax return under the existing regime. However, the taxpayer has to make the necessary investments up to Rs 1.5 lakh and produce receipts for expenses. The existing regime leaves less disposable income in the hands of such taxpayer for household spending. However, for the same individual earning Rs 10 lakh, the new regime leaves a higher disposable income of Rs. 39,000 (as shown below).

For a salaried income of Rs 10 lakh
Income Old Regime New Regime Difference
Salary 10,00,000
Total income 10,00,000
Income Tax 1,12,500 75,000
Add: Education cess @ 4%
4,500 3,000
Total Tax Payable
1,17,000 78,000 39,000

Hence, the government has introduced the new optional tax regime where the taxpayers, opting for, will not have to suffer any hardship of calculating the correct value of exemptions or remembering all the deductions. They can give away all such tax benefits and pay income tax on the gross income at the lower rates than existing ones. The new regime would result in tax savings for taxpayers who have limited investments and expenditure, especially in the income bracket of Rs 5 lakh and Rs 15 lakh.