Financial Planning for new Tax Regulations

Dr. Priya Kalyanasundaram

             Our Finance Minister Smt. Nirmala Sitharaman presented the first Union Budget 2020 on February 1, 2020 in the parliament after BJP led government came to power for the second term during general elections 2019 . So there were many expectations from the budget. This budget proposed a new tax scheme with 6 different slabs for individual tax payers as compared to 3 slab scheme currently applicable. The option was given to the individual to decide which scheme of tax, either the old one or the new, is beneficial for him.

The process of payroll function needs to be tweaked to accommodate the choice of the individual employee who wishes to opt for new scheme of taxation. Further, this declaration of choosing between old and new scheme has to be taken each year. Under the new scheme, the taxpayer will have to give up many of the exemptions and deductions that were offered in the older system to avail the benefits of lower tax rates.

The Table 1 below gives us a comparative tax structure applicable to employees under new and old scheme. The surcharge and cess on tax will be applicable at existing rates. The individual also has  to do his tax planning well in advance to make declaration with his employer.

Existing tax regime vs. new tax regime

Old Regime		New Regime
Income Slabs	Rate of tax	Income Slabs	Rate of tax
Up to INR 250000	0	Up to INR 250000	0
INR 2,50,001 to 5,00,000	5%	INR 250001 to 500000	5%
INR 5,00001 to 10,00,000	20%	INR 5,00,001 to 7,50,000	10%
Above INR 10,00,000	30%	INR7,50,001 to 10,00,000	15%
		INR10,00,001 to INR 12,50,001	20%
		INR 12,50,001 to 15,00,000	25%
		Above 15,00,000	30%

The exemptions and deductions that would not be available to the employee under new tax regime are house rent allowance, leave travel concession for domestic travel once in a block of two years, standard deduction from salaries, professional tax, interest on borrowed capital for buying house property, deductions from Gross Total Income under chapter VI A on account of investments made in tax saving the various instruments like PPF, EPF, life insurance premium etc.  The HR department have to be aware that the employee can change this option every year if he/she does not have income from business or profession.

Action Points for the HR team:

• They need to arrange an expert talk for the employees to understand the new tax regime vs. old tax regime
• Organize training session for the HR and accounts department’s employees that deal with tax computations for individuals as well as deal with corporate taxes
• Connect with the information technology payroll software provider to make changes to the payroll software to take care of the changes as per the budget 2020
• Offering  comparative tax liability calculation as per old scheme and new scheme to every employee, if possible

If organizations begin early, they can effectively engage with the employees in their financial planning and avoid last minute hassles to comply with the new regulations.