Key Changes in India's 2021 Budget for Income Tax Slabs

Addressing the evolving tax landscape in India, the government has introduced several significant changes to the income tax regime for the upcoming fiscal year. These changes are detailed in the 2021 budget, which endeavors to make the new tax regime more attractive and equitable for taxpayers. In this article, we will delve into the key modifications, providing a comprehensive guide for all stakeholders involved.

Introduction to New and Old Tax Regimes

The Indian Finance Minister, in the 2020 budget, introduced a 'New Tax Regime' with updated tax slabs and rates, alongside certain incentives. This new structure offers taxpayers two options: the Old Tax Regime and the New Tax Regime. However, it's important to note that the new regime comes with a caveat, as all existing deductions and exemptions under the old regime are removed.

Common Exemptions and Deductions

Before we explore the changes announced in the 2021 budget, let's revisit some of the typical exemptions and deductions that taxpayers have availed in the past. These include:

Rural housing deduction Educational cess deductions Interest on savings account Various investment-based deductions under Section 80C

Key Changes in the 2021 Budget

The 2021 budget introduces several significant modifications to the tax regime, designed to enhance its appeal, particularly for taxpayers. The changes are summarized below:

1. Simplification of Tax Slabs

Changes in New Tax Regime

One of the primary changes in the new tax regime is the reduction in the number of tax slabs. Previously, the new regime had seven tax slabs. Now, the government has simplified it by reducing the slabs to six. This simplification is expected to reduce the tax outgo for individuals within these slabs.

Old Tax SlabsNew Tax Slabs 0 - Rs. 2.5 Lakh0 - Rs. 5 Lakh 2.5 Lakh - 5 Lakh5 Lakh - 10 Lakh 5 Lakh - 10 Lakh10 Lakh - 20 Lakh 10 Lakh - 15 Lakh20 Lakh - 50 Lakh 15 Lakh - 50 Lakh50 Lakh - 1 Crore Above 50 LakhAbove 1 Crore

As shown in the table, the new slabs are more consolidated, which may simplify tax calculations and reduce compliance costs for taxpayers.

2. Zero Tax for Income Below Rs. 7 Lakh

A significant change introduced in the new tax regime is the exemption for individuals earning less than Rs. 7 lakh annually. While this limit was previously Rs. 5 lakh, the extension to Rs. 7 lakh is expected to benefit a broader range of taxpayers. With this change, taxpayers earning below Rs. 7 lakh need not pay any income tax.

3. Standard Deduction for Salary Earners

To increase the attractiveness of the new tax regime, the government has introduced a standard deduction for salary earners who earn more than Rs. 15.5 lakh annually. This standard deduction is a one-time, fixed amount of Rs. 52,500, which is then deducted from the taxable income. For instance, if a taxpayer has a taxable income of Rs. 20 lakh, this deduction would reduce their taxable income to Rs. 19,47,500.

4. Reduction in Surcharge for Super Rich

The fourth change pertains to the reduction of the surcharge for individuals earning more than Rs. 5 crore annually. Earlier, individuals in this high-income bracket paid a high surcharge rate of 37%, which resulted in a 42.74% maximum tax rate. The new tax regime has reduced this surcharge to 25%, lowering the effective maximum tax rate to 39%, making it more attractive for high-income earners.

5. Enhanced Leave Encashment for Retirees

A notable provision for employees nearing retirement age is the increased tax benefit for leaving encashment. The budget amended the limit for tax-free encashment of leaves to Rs. 25 lakh from the previous Rs. 3 lakh, offering a significant advantage to individuals terminating their employment.

Default Adoption of New Tax Regime

An unexpected surprise in the 2021 budget is the default adoption of the new tax regime. Taxpayers now have to explicitly opt-out of the new regime if they wish to continue with the old regime. This change is aimed at streamlining tax processing and compliance, encouraging wider adoption of the new system.

Conclusion

The 2021 budget has made several significant changes to the income tax regime in India, designed to provide greater tax incentives and simplification. These changes are expected to benefit both salaried individuals and high-income earners, making the new tax regime more attractive and equitable. As always, it is crucial to stay updated on these changes to optimize your tax planning and financial strategy.

Key Takeaways

Reduced tax slabs in the new tax regime Zero tax for income below Rs. 7 lakh Standard deduction for taxpayers earning more than Rs. 15.5 lakh Reduction in surcharge for the super-rich Enhanced leave encashment for retirees

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