She has increased the standard deduction for salaried class by Rs 25,000 from Rs 50,000 to Rs 75,000 while keeping it at the same level of Rs 50,000 for the old regime. This means that tax liability across slabs will reduce by Rs 7,500 which, with 4% education cess, will become Rs 7,800.
The revised scheme maintains the income exemption up to Rs 3 lakh but tweaks subsequent tax slabs.The 5% rate will now apply from Rs 3 lakh to Rs 7 lakh rather than Rs 6 lakh currently. Similarly, the 10% rate kicks in at Rs 10 lakh instead of Rs 9 lakh. This means that tax liability for income between Rs 6 lakh and Rs 7 lakh has gone down from 10% to 5% which translates into a benefit of Rs 5,000 for taxpayers having income of more than Rs 7 lakh.
Similarly, she has also reduced tax liability for the income between Rs 9 lakh and Rs 10 lakh by 5% from 15% to 10%, which means an additional Rs 5,000 savings. Adding Rs 7,500 savings at 30% for those with incomes of Rs 10 lakh due to increase in the standard deduction by Rs 25,000, the total calculation works out to Rs 17,500, the figure mentioned in the Budget speech by Sitharaman. This amount will become Rs 18,200 with education cess.
These increased savings are expected to put more disposable income in the hands of the middle class.
Those who opt for the old tax regime (the new regime is the default option) will not benefit from these changes. In the new regime, income up to Rs 7 lakh is tax free. Under the old tax regime, only income up to Rs 5 lakh is tax free.
In this situation, a taxpayer having annual income of Rs 10 lakh, will pay a tax of Rs 48,100, including education cess of Rs 1,850, under the new tax regime after accounting for the standard deduction of Rs 75,000.
But in the old tax regime, the taxpayer with income of Rs 10 lakh will pay a tax of Rs 1,17,000, including cess of Rs 4,500. The taxpayer can claim deduction against investments in tax-savings instruments like equity-oriented mutual funds, pension funds, life insurance policies among others. Even if one exhausts the investment limit of Rs 1,50,000 under Section 80C and accounts for home loan interest of Rs 1,50,000, the tax saved is only Rs 60,000, or Rs 62,400, including cess. That still leaves a tax bill of Rs 56,400 under the old regime as against Rs 48,100 under the new regime.
Take another case where a taxpayer has an income of Rs 15 lakh. Under the new regime, where no deductions are allowed, the taxpayer will pay Rs 1,48,200 including the health and education cess of Rs 5,700. In the old tax regime, his tax liability will be Rs 2,73,000 including cess of Rs 10,500. Again, after Rs 1.5 lakh under Section 80 and another Rs 1.5 lakh as home loan interest, tax liability will be reduced by Rs 93,600 including Rs 3,600 as education cess. He would still have to pay tax of Rs 1,79,400, higher than the tax liability of Rs 1,48,200 under the new tax regime.
So when does the old regime make sense? If the income is around Rs 9,30,000 and one invests Rs 3 lakh in tax-savings schemes, the old regime becomes more attractive . In this case, his tax liability under the old regime will be Rs 40,040 including Rs 1,540 as cess. Under the new regime, his tax liability would be Rs 40,820 including 1,570 cess.
But to make the old regime beneficial, one has to invest Rs 3 lakh in tax-savings schemes. Otherwise, the new scheme will be better.