Jagoinvestor

February 26, 2010

New income tax slabs and its Impact on Common Man’s financial life

Finance Minister Pranab Mukherjee on Friday announced revised tax slabs for individual tax payers and also said that the New tax rates would offer relief to 60 per cent of taxpayers.

But looking at the below comparison between the tax payable last year and the proposed one it seems that the so called “Aam Aadmi”, the middle class would not be gaining so much tax benefits as there are absolutely no tax savings for the person earning up to Rs. 3 lakh p.a. and those who are earning up to Rs. 4 lakh would end up saving only Rs. 10,000.

income tax slab

New tax slabs would benefit greatly to the higher middle class as compared to the Aam Aadmi, though the additional investment of Rs. 20,000/- in the infrastructure bonds would provide some relief especially to those who are interested in traditional savings tools.

Introducing Saral-2 form back is a good initiative and would make it more Saral for the tax payers to file their IT returns without hassle as the current ITR are not easy for the taxpayers to prepare & file on their own.

In order to make tax compliance process more efficient two more CPCs (Centralized Processing Centre) are proposed to be set up apart from extending โ€œSevottamโ€ a pilot project at Pune, Kochi and Chandigarh to four more cities in the year. Sevottam provides a single window system for registration of all applications including those for redressal of grievances as well as paper returns.

Long awaited increase in the limits for turnover over which accounts need to be audited is also enhanced to Rs. 60 lakhs for businesses and to Rs. 15 lakhs for professionals as compared to the existing limits of Rs.40 lakh and 10 lakh respectively.

Tax Slabs for 2010-2011

The basic threshold limit for income tax exemption will remain at Rs.1.60 lakh. Under the new proposal, 10 per cent tax will be levied between Rs.1,60,001 and Rs.5,00,000, 20 per cent on incomes between Rs.5,00,001 and Rs.8,00,000 and 30 per cent above Rs.8,00,000.

Apart from this you also get Rs 20,000 additional Tax benefit if you invest in long term Infrastructure Bonds.

Tax Slabs

OLD NEW TAX RATE
Upto Rs.1.6 lakh Upto Rs.1.6 lakh NIL
Rs.1.6 – 3 lakh Rs.1.6 to 5 lakh 10%
Rs.3 – 5 lakh Rs.5 to 8 lakh 20%
ABOVE Rs.5 lakh ABOVE Rs.8 lakh 30%
Tax Slabs
OLD NEW TAX RATE
Upto Rs.1.6 lakh Upto Rs.1.6 lakh NIL
Rs.1.6-3 lakh Rs.1.6 to 5 lakh 10%
Rs.3-5 lakh Rs.5 to 8 lakh 20%
ABOVE Rs.5 lakh ABOVE Rs.8 lakh 30%
  • Exemption Limit for Women : 1.9 Lacs
  • Exemption Limit for Senior Citizen : 2.4 Lacs

How Much do you Save because of New Tax Slab?

Income

Old Slab

New Slab

Your Savings

60,000 0 0 0
3,00,000 14,000 14,000 0
4,00,000 35,020
24,720
10,300
5,00,000 55,620
35,020 20,600
6,00,000
86,520 55,620 30,900
7,00,000
117,420
76,220
41,200
8,00,000
148,320 96,820
51,500
9,00,000 179,220 127,720
51,500
10,00,000
210,120 158,620
51,500

What are your comments on New Tax Slab ? How is it going to Impact you?

This is a guest article written by Mr. Rishabh Parakh who is a Chartered Accountant and Director at MoneyPlant Consulting he had been contributing to leading newspapers like DNA & NavBharat (Money Plant Consulting is a premier outsourcing & a financial services provider which aims to offer solutions for all your financial needs and queries.)

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Sukhmani
Sukhmani
12 years ago

Hi Manish,

I have a question. How many indians in age group of 20-29 earn upto 3 Lakhs.

Thanks,
Sukhmani

bose
bose
13 years ago

Hi Manish,

I have a question on House/Property income or loss!

Any idea on how to make use of this provision as I have recently taken a home loan and had got it renovated(repairs went to around 4 lacs ). Please let me know if I can declare this as loss on the currently letout property

Warm Regards,

Bose K

Suhas
Suhas
13 years ago

Hi Manish,

Does the Bond issued by NHAI (http://www.nhai.org/bonds1.html) fall under the 20000 bucket ?

Thanks
Suhas

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[…] by Manish Chauhan on March 14, 2010 With the tax-planning season about to end, most individuals are rushing around to make investments to minimise their tax liability. And although, the last date for filing income tax returns is just a few months away (July 31), some of us are still unaware about the procedure and guidelines. Chartered accountant Rishabh Parakh, who is the director of Money Plant Consulting, explains the doโ€™s and donโ€™ts about filing returns & doing your tax planning. Have a look at recent changes in the Income tax slab and how it affects the common man. […]

PRADEEP KUMAR BASAK
PRADEEP KUMAR BASAK
14 years ago

Dear Manish,
Hello, I am a reader of your blog since last one year, really you are doing a great job by educating, advising,aquainting,cautioning & by every possible means to people. By educating people they at least are saved from so many “financial Thugs” now a days !!. By proper advising to people regarding their financial problems you are again doing a wonderful job. My all hearty & warm wishes to you always.I cannot express my word of thanks, that you are doing a great help to humanness directly & indirectly. My salutes again!!!!!

Srinivas
Srinivas
14 years ago

@anoop,

Then it is just Broadcom (your employer) decision to avoid employees submitting fake rental receipts.
๐Ÿ™‚ if owner refuses; then better to change flat…:) or company ๐Ÿ™‚

Deepak Gupta
Deepak Gupta
14 years ago

Manish and other friends,

What is NPS and DTC ? Can any one explain more in detail or some useful links for those terms ? I know I can google but if there are any recommended readings …

Thanks,
Deepak

Jitendra Solanki
Jitendra Solanki
14 years ago

Hi,

Lot of Discussion about DTC and its after effect.

We in india live heavily on subsidie sprovided by teh government.Yestearyears,We were on Fixed guaranteed returns by teh government which is almost vanished now.Then ther are subsidies on Petrol,LPG,Food and many others.
Indirectly there is also a subsidy on Tax Benefits to promote savings.This is EEE which means everything we save and get in return is tax Free.Due to this in India savings rate is very high or i can say the highest.
To cut subsidies in savings the option isEET which i beleive will be the future.our Honourable FM has very well clearly indicated of Moving to thsi structure but gradually.
We are afraid today because we have heard about the commitee recommendation given for DTC.I believe, like you and me our FM also knows if it is implemented as it is, it will kill everything.So my thinking is -it will be implemented but with modifications and keeping the high saving rate of indians in picture.
As far this budget goes its a well drafted budget with all reforms kept in mind.
Salaried class will surely get benefits by High Disposable income.Yes price rise or inflation is a concern and that FM has very well indicated by giving a fiscal Deficit target.Lets give some more time to him.

jitendra solanki
jitendra solanki
Reply to  Jagoinvestor
14 years ago

Manish,

What i mean was the recommendation from teh commitee has to be implemented with some modification.Because if its implemented as suggested it will be very harsh on small investors.Thsi our Hoonourable FM knows ant thats why the changes in tax structure has been done.May be we will see more bonanza from him before DTC is implemented.

Sathya
Sathya
14 years ago

If the said DTC comes into effect, i will b left with no option but to leave India….
:D:D:D

Anoop
Anoop
14 years ago

I think if govt comes with some plans where you can invest limited amount and it will be tax free at maturity in the long run will be good. Like PPF, you can invest only 70K and lock in period 15 years.

Or it could be like long term investment will be tax at lower rate like 10% or so. Right now what DTC stands is the we have to pay 30% tax on all long term investment as it will add our income to more than 25Lakh for sure. Even withdrawal according to the income slab will not help. or they can tax according to the slabs. Though it no longer remain simple then.

This will also help as we dont have any social security schemes.

-Anoop

Krishna
Krishna
14 years ago

Hi,
Manish
I think removing the ELSS from 80C in DTC will have negative effect on market as people will not be interested to invest as they do not get any tax benefit even if they do invest. Then our options are limited either you have to apy tax else invest in Govt funds like PPF,LIC where we will get very low returns. Then financial Planning would be mess.What’s ur opinion on this?

Srinivas
Srinivas
Reply to  Jagoinvestor
14 years ago

@ Manish,
No, PPF is still part of 80C.
According to DTC, 80C includes PPF, NPS, Life insurance premiums, Super-Superannuation and Provident Fund (EPF) but maturity amount is taxed for all of these.

Krishna
Krishna
Reply to  Jagoinvestor
14 years ago

Hi,
Manish,
Then people have to rely on Endowment Policies of LIC to get tax benefit and even maturity amount will be taxed from that ,in that case you wont get atleast 5-6% return on money invested which is absurd ,there by Govt is making Middle class people life miserable.

Srinivas
Srinivas
Reply to  Krishna
14 years ago

Yes. DTC introduces EET, With this, one cannot avoid tax but can postpone paying tax.

we can mainly depend on PPF, NPS for tax saving and of course PF is anyway default.

Anoop
Anoop
Reply to  Jagoinvestor
14 years ago

It is like you do the debt part from the tax exempted limit of 3 Lakh like NPS, PPF etc and equity from MFs. I think section 80c is no longer there.

It could also be that new product will come into picture to give the max benefit. Secondly the focus of DTC is not on giving Tax saving incentives but to give money to the earner and let him spend and invest.

– Anoop

Krishna
Krishna
Reply to  Anoop
14 years ago

Anoop
I agree with your point.But my conecern is you have very limited options for investing with Products like EPF,NPS.Lets see does the govt.launch new schemes with better returns

Ramesh
Ramesh
14 years ago

Hi Manish,

I am paying around 1,30,000 as home loan interest but I rented it out and getting around 1,20,000/annum. How this impact in my new direct tax code if they take the home loan interest from tax deductions.

pattu
pattu
Reply to  Jagoinvestor
14 years ago

My understanding is:
New tax code eliminates benefits for self occupied properties only. Rented properties can be used for tax purposes in the usual way.
See

There are several other articles on this.

pattu
pattu
Reply to  Jagoinvestor
14 years ago

Yes it is bad for people paying EMI on self-occupied property. However there will be some opposition to this and hopefully the benefits will stay

Anoop
Anoop
Reply to  Jagoinvestor
14 years ago

I think benefit has to be there and more so it should be for the right person and right reason. India gives full interest benefit to the rented house and limited tax benefit (1.5 L) for self occupied house. This is ridiculous. This is a great conspiracy of govt and realtors.

If the vision is that every family or person has atleast one house. Then we should encourage people to buy and stay in it. And give the tax benefit on those house only. House bought for investment (like second and more or not rent ones) should be taxed differently or no tax benefits. They should also be charged more interest rates for second house. This will remove speculation and will create genuine home owners and we can hope one house for one family at a reasonable cost.

Recently I read an article that China has tightened its norm for real estates. There people buying second home have to give more down payment (40%), more interest rates. Norm for lending for banks also made stricter.

We should also be like that. I feel that with so population and with less land, making real estate so much attractive option is unnecessary. It will be beneficial but speculation has to go away for everyone to have one atleast.

We are in need of real estate reform badly. But that will never happen. After it is biggest source and sink of black money in india and money generator for politicians.

-Anoop

Chandu
Chandu
14 years ago

Hi all,

Completely agree with Manish that new tax rebates will only benefit higher middle class. In my opinion, A person who gets a salary of Rs 1,00,000 per month have to pay
Rs 1,20,000 under new tax considering HRA/Home Loan exemptions and 80C investments which is just 10% for him. I consider people who get more than Rs25,000 per month as higher middle class. Govt should get more tax rebates for people who get less than 25,000 which will definitely increase the consumption as well.

In my view,
Basic exemption of tax should be increased without scope for medical bills, conveyance allowance or HRA. In my view, all fake bills should be avoided.
Home loan should be viewed as a long term investments which will come under 80C.

In other ideal view, non-salaried class are the ones who evades tax more. So every transaction or bill should quote PAN no which will pave way for more trasparency

Srinivas
Srinivas
Reply to  Jagoinvestor
14 years ago

yes. tax evasion is the main problem in India. Govt should use PAN in all transactions and make it computerized.
1. If we declare HRA then we should give PAN number of the Owner, Rent must be paid in non-cash mode and employee must submit bank statement for HRA claim;
in any case, if we tamper rent then more tax for owner.
2. Link all bank’s database to deduct TDS appropriately, Now people park money in different bank branch to evade tax.
3. I have never see any body adding interest earned from NSC during tax filing; At least IT dept can detect from the tax collected from the particular PAN what is high income group and add NSC interest and deduct tax. The software must be made intelligent to add these.

Most of the people took home loan to serve home need and tax purpose, those will be hit by DTC. Govt justification is having raised tax slab till 10L will work out. but industry and opposition parties argues for not moving home loan out of 80C.
Mr.Pranab also promised to consider the option saying “Having a home” is a big dream for the middle class citizen of India.
Need to wait and watch

RISaHBH parakh
RISaHBH parakh
Reply to  Srinivas
14 years ago

yes,

tax evasion is the biggest problem as mentioned in my earlier comment, really dont know why govt is not taking actions against small & medium business class people as against the salaried class.

Srinivas you are absolutely right that people are not adding NSC int. but that is also not known to them the real wonder lies in bank interest and each and alomost every one is deriving income may be most nominal amount say 500 to 1000 bucks but as per IT act and after the abolition of sec. 80L entire interest income from all the bank accounts held should be added to total income and tax has to be paid thereon.

till date in last four years i have filed around 30000 tax returns and hardly .01% people had declared the interest and paid the tax thereon (inspite of informing them) reasons are:- since every body else is not declaring they also dont bother and Govt too is not taking any action against them as i think the cost of collecting the same must be more than their revenu ๐Ÿ™‚

rishabh parakh
rishabh parakh
Reply to  Srinivas
14 years ago

yes,

tax evasion is the biggest problem as mentioned in my earlier comment, really dont know why govt is not taking actions against small & medium business class people as against the salaried class.

Srinivas you are absolutely right that people are not adding NSC int. but that is also not known to them the real wonder lies in bank interest and each and alomost every one is deriving income may be most nominal amount say 500 to 1000 bucks but as per IT act and after the abolition of sec. 80L entire interest income from all the bank accounts held should be added to total income and tax has to be paid thereon.

till date in last four years i have filed around 30000 tax returns and hardly .01% people had declared the interest and paid the tax thereon (inspite of informing them) reasons are:- since every body else is not declaring they also dont bother and Govt too is not taking any action against them as i think the cost of collecting the same must be more than their revenue ๐Ÿ™‚

NKanani
NKanani
Reply to  Jagoinvestor
14 years ago

Talking about HRA, if actual bills are made mandatory, then, i guess, lot of us will have to move at different places – since most of the owners would not be willing to consider ‘rent’ as a taxable income – worst still, we wont get rented houses, OR, they would give bills only of the amount that they could manage as “income” from house rent!

Anoop
Anoop
Reply to  Jagoinvestor
14 years ago

But the main problem is that now you have to give the PAN is mandatory with the reciept from next year. It means that receipts should be original not fake. Question is will owner will give you that?? My owner gave me some crap reason not to have a PAN.

If I change flat now, then i will have to talk about this also – Receipt with correct rent and PAN duly signed.

Regards,
Anoop

Srinivas
Srinivas
Reply to  Anoop
14 years ago

@anoop

Though submitting PAN number of the owner is good, But I do not think govt can implement is so fast.
Can you point me where you read about this? I did not find it in DTC document

Anoop
Anoop
Reply to  Srinivas
14 years ago

I did not read about it. In my company (Broadcom), the Account asked for it. They gave us this format. He also told me that from next year it will be compulsory.

So I just thought it is better to ask the owner in advance. Google did not show any result when i tried to search. Only issue will be that our company should accept the receipts we give them and don’t cite the rule as this is not approved by IT so we cannot take it.

Regards,
Anoop

Nkanani
Nkanani
Reply to  Jagoinvestor
14 years ago

Hi Manish,

The actual bills are mandatory, but very few of the employees submit actual bills. And some owners do not accept cheques – they need just cash. Third, PAN number quoting is very difficult – i have changed around 4-5 houses, and never found an owner who is willing to give his PAN number.

Anoop
Anoop
14 years ago

Hi Manish,

It seems that everyone is well convinced that DTC is cominng for sure. I feel there have many attempts in the past to reform Taxes but failed. Though the FM said in the budget but so far there was no discussion in the parliament and there is no such date planned to do so. Until it is not done in the parliament and if it is done then other political parties will let it pass in the same form, that has to be seen. Not because of govt majority but public defame by the opposition, govt may have to change. BJP already raised some issues, and Left and other will say that it is not for common man it is for HNI, and other high class guys.

I think everyone was thrilled with the propect of less tax but many (not all) ignored the fact we will be moving to EET. So the questions is will it help us as a common man?? Because many talk about EEE for the govt sake as it is not possible for the govt to do by putting pressure on the coffers. But what about the common man. For example right now I save some X ammount in MF SIPs keeping target Y in my mind as capital gain is not taxed. If DTC comes in to picture, then my target needs to be reset to some Y+Z as the total amount will be taxed and i got to add more to my total saving amount X. Say that is P. Now if with the DTC in place, I get P atleast then it is ok, otherwise I am at loss.

Secondly, it sovles the problem of simplication of taxes but does not solve the problems of
– incresing the Tax base
– Tax evasion. it hopes that low taxes will eliminate the problem. Is that true?? There are so citation of statistics. Bad habits die hard. People dont want to pay. For many 10% will be more and they want to hide. I think the problem of tax evasion is more in business than salaried class. Mostly corrupt people need to hide as they can not declare it (problem is different).
– Will not solve the corruption

I feel with existing laws, if tax evasion, better tax base and black money issues are solved, we can move to lower tax regime.

So lets see. DTC might remain in dreams, and we should not be surprised.

You might read different take http://new.valueresearchonline.com/story/h2_storyview.asp?str=101262

Regards,
Anoop

rishabh parakh
rishabh parakh
Reply to  Anoop
14 years ago

Positives about EET ๐Ÿ™‚

yes there are many negatives as discussed about EET regime which is the favourite method of Governments to tax citizens worldwide.

EET will remove almost all the tax-free investments from the market. EET will bring in awareness to make investments with a purpose of creating wealth not just to save tax. In that way, EET is positive. Till date, in spite of the financial reforms happening for the past 15 years, Financial Planning in India:) = Tax Planning. This has been brought about because of the EEE regime.

Equating tax planning with financial planning has lead to financial disasters. Insurance Plans have been taken without life cover or adequate cover! Many business people have shown lower income in their tax returns. The list goes onโ€ฆ The effects of all these are to save on tax but lose out on wealth.

The opportunity is being now created to get out of โ€œSaving Tax Modeโ€ and get into โ€œCreating Wealth Modeโ€.

rishabh parakh
rishabh parakh
Reply to  rishabh parakh
14 years ago

hi All,

what do you think about this (& the only one, may be) positive:) site of EET???

NKanani
NKanani
Reply to  Jagoinvestor
14 years ago

As mentioned by Anoop, it will be a disastrous effect to have EET for products which have been EEE. This will actually increase money with the govt. and also increase the corruption (since govt. would not want to pass the benefits of tax back to tax payers!). We as individuals would rather be better off without DTC, at least we can depend on EEE investment instruments (PPF, ELSS, etc.)

pattu
pattu
14 years ago

Eishah, Srinivas,

I have NPS as I am central govt servant. Its design of equity:debt ratio is pretty good.
50 equity upto age 3 and equity decreases every year upto 60 when it hits 10%
For a non-govt servant there may be processing fees involved and for them its like a cheap ULIP.
See here for instance
http://businesspandit.wordpress.com/2009/07/14/nps-not-cheap/
http://ibnlive.in.com/news/new-pension-scheme-dont-invest-yet/92660-15-p1.html

For a govt servant its a good scheme better then EPF However there are some disadvantages. If they deduct X from my monthly salary towards NPS, govt contributes X. My total taxable salary per month = salary+X.
IN my case 2X times 12 exceeds Rs. 1 lakh towards 80C and I don’t need any other tax saving instrument. However I have several others and am eagerly awaiting the new tax code.
A govt servant cannot change the equity:debt ratio but others can.

Srinivas
Srinivas
Reply to  pattu
14 years ago

Pattu,
Thanks for sharing. I hope NPS will take some time to pick up.
I hope next year, news papers experts will start writing more about NPS.

We will also evaluate NPS in depth in coming days.

pattu
pattu
14 years ago

Thanks Srinivas,

This is good news. I need to only invest Rs. 20,000. So we need to wait and see which is an acceptable long term infrastructure bond. I will save Rs. 51500 in the new slab and using these bond I can go one slab lower. This leaves me a minimum of Rs. 5000 per month to invest elsewhere. A much need relief for me.

rishabh parakh
rishabh parakh
Reply to  pattu
14 years ago

Hi All,

There are two issues to consider before buying these bonds, the fine print says the bonds will be notified by the Central government. Expect this to come in a month or two until then, it is unclear whether private companies would be allowed to issue such bonds.
The Budget has only said the new incarnation would be โ€œlong-term” the bonds could be for a minimum of five years or maybe as high as 10 years.

Also, unlike in the earlier version, where interest earned from these bonds was also tax-deductible to a certain extent, the new avatar will not offer any such benefit as Section 80L has long been abolished. It would be interesting to see the interest rates of these new infrastructure bonds and how competitive they would be.

Srinivas
Srinivas
Reply to  rishabh parakh
14 years ago

Hi rishabh
Yes. It’s a good news. govt will contribute Rs.1000 for 3 years.
Considering the fact DTC has NPS in 80C, it would be better to open NPS in next financial year (2010-11) and get Rs.3000
DTC has only PPF, NPS, Insurance,EPF,Super superannuation. Though NPS does not have agents, from next year people will deviate and open NPS because it is part of tax saving.
I hope next year govt will gear up advertising to popularize NPS.

If else, I see LIC coming up with many policies and mis-directing people to buy endowment and non-term plans.

Srinivas
Srinivas
14 years ago

@Free Financial Calculators and All

The information you got from internet was very old which was applicable when we used to get 20% rebate on tax investments. this is almost 5 year old news
Your understanding is incorrect.
As per the budget 2010-11, You can claim tax benefit to the maximum of Rs,20,000 towards contribution to infrastructure bonds.
Govt only said investment in long term infrastructure bonds as may be notified by Central govt. Govt is yet to define Is same old infrastructure bonds to continue or define one more long term bonds.
A new section 80CCF will be inserted now. Wait till April end to get clarity on infrastructure bonds.

pattu
pattu
14 years ago

Manish,

Infrastructure bonds comes under sec 88. from what info I could get on the net, 20% of sum invested in these upto a max of 20,000 is deductible. So you would have to invets Rs. 1 lakh to get Rs. 20, 000 deduction. Also can you get these bonds only from ICICI and IDBI only?

Srinivas
Srinivas
Reply to  pattu
14 years ago

@Free Financial Calculators and All

The information you got from internet was very old which was applicable when we used to get 20% rebate on tax investments. this is almost 5 year old news
Your understanding is incorrect.
As per the budget 2010-11, You can claim tax benefit to the maximum of Rs,20,000 towards contribution to infrastructure bonds.
Govt only said investment in long term infrastructure bonds as may be notified by Central govt. Govt is yet to define Is same old infrastructure bonds to continue or define one more long term bonds.
A new section 80CCF will be inserted now. Wait till April end to get clarity on infrastructure bonds.