Budget 2020|Personal tax rate cuts – to elect or not to elect?

Amit Singhania and Gouri Puri, Partners, Shardul Amarchand and Mangaldas & Co.

The middle class cheered as the Hon’ble Finance Minister announced significant cuts in personal tax rates for individuals and HUFs. The government vocalised its underlying intent to boost people’s income and stimulate demand and growth. However, the tax cuts are accompanied by a cost where taxpayer electing the lower tax regime would need to forego specified personal tax deductions and exemptions.

Such give and take is reminiscent of the tax cuts offered to companies in September 2019 and plausibly justified in light of the fiscal deficit.

The new tax rate regime is summarized below.

As such there is no bright line test to make this election and for the salaried folk the simplest way forward is compare previous year’s tax outflow with the tax computed under the new regime. The possibility that a taxpayer with heave entitlements to personal tax deductions ends up with a lower effective tax rate than the new regime cannot be ruled out.

The Bill provides for two separate timings for taxpayers to voice their election for the new lower tax regime.  In case of the salaried class, the Bill proposes that the election should be made at the time of filing the tax return. It will be interesting to see how the timing of such election marries with the employer’s obligation to deduct TDS. Employers are likely to deduct TDS at the higher of the tax rates on a more conservative note, in which case individuals will need to claim refund of excess taxes withheld. Salaried individuals can make a new election each year where they may choose between personal tax cuts versus personal tax deductions and exemptions.

On the other hand, individuals and HUF with business income are required to make an election while filing their tax return for AY 2021-2022. Such election is permanent and may only be withdrawn once. Once an individual/ HUF withdraws from the lower tax regime in favour of deductions and exemptions they cannot revert to the lower tax regime thereafter.

Needless to say the simplicity of moving towards a lower base line tax rate as against a host of personal tax deductions and exemptions is inviting. However, it is recommended that each individual or HUF makes a reasoned decision on running his tax computations post due analysis.

Amit Singhania and Gouri Puri are Partners, Shardul Amarchand and Mangaldas & Co. Views are personal