SALARY CUT? RE-EVALUATE YOUR TAX REGIME

Each income level has a break-even deduction point. If you can cross that mark, stick to the old regime

0wing to the lockdown, cash flows of a large number of companies across sectors have been affected. Many have resorted to salary cuts. Meanwhile, employees will soon need to inform their employers whether they will stay with the old tax regime or adopt the new one. If their salary has changed, they may need to re-evaluate whether the old or the new tax regime is more beneficial for them.

Nature of pay cuts: Companies have cut salaries based on their financial situation. “Those that feel their cash flow mismatch is temporary have gone for deferment of salary while those that are facing a severe cash flow crunch, and which they expect will continue for long, have gone for pay cuts,” says Gopal Bohra, partner, NA Shah Associates. He adds that generally, allowances, bonus, incentives, etc. have been reduced while keeping the basic salary intact, as the latter is used to compute gratuity.

Prashant Singh, business head, compliance and payroll outsourcing, Teamlease Services, too, has a similar view. “Most companies first stopped payment of variables allowances. This will have no tax impact as many of these perks are exempted from taxation,” he says. A more hassle-free tax regime:

The new income-tax regime introduced in the February 2020 Budget comes with lower tax rates. Broadly, people in the middle- and lowerincome brackets, and those who claim lower tax deductions and exemptions, are more likely to benefit from it. The current environment of salary cuts and job losses will make this tax regime more attractive. “Many households are currently trying to conserve cash rather than make long-term investments and will find the new tax regime more attractive,” says Suresh Surana, founder, RSM India.

Many of the pitfalls of the old tax regime can be avoided by opting for the new one. “Tax benefits under the old regime are available on specified instruments that come with a lockin. The younger generation, which prefers to spend rather than save, does not like this. Tax-saving investments also do not suit senior citizens who need liquidity,” says Kapil Rana, founder and chairman, Hostbooks, a start-up that provides automated business solutions for managing accounts and finances. Some taxsaving instruments give low returns. Investors who are mis-sold these products pay a heavy price.

Benefit from deductions and exemptions: The old regime is better suited for people in the higher income brackets. “There is a class of employees that still has good cash flows and adequate funds to invest. Their pay structure is tax-optimised. Such employees should go for the old regime as they will benefit from all the deductions and exemptions allowed there,” says Rana. Some of the key exemptions and deductions relate to House Rent Allowance, interest on housing loan, set-off losses, investments under Section 80C and 80D, and so on.

Investments in tax-saving products like Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS) can help people build a corpus over the long-term. Those who have purchased a house will also find the older tax regime attractive as they will be able to avail of a large deduction under Section 24 (up to ~2 lakh on home loan interest repayment) and another under Section 80C (up to ~1.5 lakh on principal repaid). Says Archit Gupta, founder and chief executive officer, Cleartax: “A taxpayer who has large outflows towards investments, housing loan, education loan, children’s tuition fee, etc may like to continue with the old tax regime.”

Next, let us turn to a few cases involving various levels of income and various levels of deductions to see which regime is beneficial.

Case 1: Zero deduction availed: Someone who is in the income bracket of ~5-15 lakh, does not avail of any deductions and is in need of higher disposable income will benefit by opting for the new tax regime ( see table: When no deduction is availed).

Case 2: Standard deduction and Section 80C availed:

We also ran the numbers for taxpayers who have income levels of ~12.5 lakh and ~15 lakh. In this case, the tax payers avail of the standard deduction of ~50,000 and the ~1.5 lakh deduction under Section 80C. Even in this case, the new tax regime remains more attractive.

Case 3: Section 80C, 80D and 24

availed: Next, let us look at the case of taxpayers who have income levels of ~12.5 lakh and ~15 lakh. Here, in addition to the standard deduction and Section 80C, they also avail of deductions such as under Section 24 (~2 lakh on interest repaid on home loan for self-occupied property) and Section 80D (~25,000 on health insurance premium). In this case, the balance tilts in favour of the old regime (see calculations for cases on the Business Standard website: https://bit.ly/36ocs4t).

How should you decide? To decide between the two tax regimes, each tax payer needs to run the numbers for himself. Many tax portals offer this facility. By entering your annual taxable income and all the deductions you are entitled to, you will be able to find out whether the old or the new regime will be more beneficial to you ( See: Number Game).

If for a certain income level, the deductions you can avail are below the number given in the table, you should go for the new regime. On the other hand, if you can avail of a higher level of deductions, continue with the old regime.

Finally, some employees may inform their employers that they will go with a certain tax regime. Later, they may realise they have made the wrong choice. “Even in that case you will still have the option to switch to the more beneficial regime at the time of filing your tax return,” says Gupta.

Many portals offer the facility to run the numbers by entering annual taxable income and deductions