This Budget, the income tax exemption limit has been raised to Rs 7 lakh. But there is a caveat applicable to the new tax regime introduced in FY 2020-21
Unless you opt for the old tax regime, the new tax regime will be the one you follow by default. This is the major change the Union Finance Minister brought in this year’s Budget
The new tax regime was introduced three years ago to make citizens pay tax on real income without making deductions and exemptions. But it has not been popular
So Finance Minister Nirmala Sitharaman refined it this year. In this year’s Budget, she announced that there would be six income slabs, not five as earlier
Though the tax exemption limit has been raised to Rs 7 lakh, one can consider it as Rs 7.5 lakh in view of standard deductions including PF and children’s school fees
So, if you earn Rs 7.50 lakh per annum, that is, about Rs 60,000-plus a month, you will not have to pay any income tax. But last year, this income was taxed at Rs 39,000
In terms of savings made for claiming tax exemptions, taxpayers would normally opt for the old tax regime as it encourages people to invest. In that respect, it may be better
But if your annual income is Rs 12 lakh, your income tax will be Rs 1,11,800 under the old regime even after claiming exemptions
This would drop down to Rs 85,800 under the new regime, even with no exemptions. So, the new tax regime is the better one
It has long been a practice to make investments purely for the sake of saving on tax. Tax exemptions have been a motivating factor for people to buy or construct houses
Now, with the new tax regime fine-tuned, there is no need for external investments for the purpose of claiming exemptions
However, if you have excess funds to park in some investment schemes, you can go for PPF which is a safe bet as it offers 7.5 per cent interest
Plus, in extreme cases where a court could attach a person’s assets in case of non-repayment of loans or some other such cases, it cannot attach the saved up PPF funds.
Rather than investing in fixed deposits, one can opt for mutual funds and Systematic Investment Plans (SIP) for better returns. But they are subject to stock market fluctuations
In schemes for women, the Budget offers only a one-time new small savings scheme called Mahila Samman Savings Certificate for girls, which offers a 7.5 per cent interest rate