With the aim of simplifying existing tax structures and providing relief to individual taxpayers, in the union budget 2020-21, the government proposed significant reductions in personal income taxes for those who don’t avail of exemptions.
The proposal suggested a decrease in the income tax from the existing rate of 20% to 10% for salaries between Rs 5 Lakh and Rs 7.5 Lakh. For those in the income bracket of Rs 7.5 Lakh and Rs 10 Lakh, the tax will be reduced from 20% to 15%. For individuals earning between Rs 10 Lakh and Rs 12.5 Lakh, and Rs 12.5 Lakh and Rs 15 Lakh, the tax will be reduced to 20% and 25% respectively from the current rate of 30%.
So, should homebuyers switch to the new tax regime? Let’s find out.
First things first, under the new tax regime, there are no tax benefits either on a home loan or on House Rent Allowance (HRA).
Currently, Section 10(13A) of the Income Tax Act, 1961 allows an exemption on HRA. For calculating the exemption amount, the lowest of the following is considered for exemption:
- Actual HRA received from the employer
- 50% of salary if the employee lives in one of the four metro cities and 40% if the employee lives in other cities
- Actual rent paid minus 10% of salary
Similarly, Section 80C of the Income Tax Act allows for deduction against principal payment of the home loan up to a threshold of Rs 1,50,000. And interest paid against the home loan is allowed as a deduction under Sec 24B up to a limit of Rs 2,00,000.
“Homebuyers have been given the option of moving to this new regime for fiscal 2020-21 or continuing with the existing income tax structure. The major disadvantage of the new regime is the non-availability of deduction of interest paid on housing loan of Rs 2,00,000 on self-occupied property. Thus, it is advisable for homebuyers to go with the old tax regime,” says Amit Goenka, MD & CEO, Nisus Finance.
The calculations
Before deciding anything, homebuyers must carefully analyse the benefits both the regime provides and calculate what’s better for them.
In the following table, Goenka explains the tax calculations under the new and old tax regime to help you make an informed decision. Take a look:
The above table clearly shows higher tax liability under the new tax regime.