New income tax slabs 2020, income up to ₹5 lakh exempt

• The government has introduced new 'optional' tax slabs for individual taxpayers.
• Instead of five different tax slabs, the new tax regime has seven tax slabs.
• It also the lowers the tax for income between ₹12.5 lakh to ₹15 lakh from 30% to 25%.

New tax slabs have been proposed by the Direct Tax Code panel to boost consumption and investment. The government hopes that increased purchasing power will push demand ahead of supply, incentivising firms to ramp up production which will reflect in GDP growth in the next financial year.

The new tax slabs increase the minimum taxable limit from ₹2.5 lakh to ₹5 lakh. At the other end of the segment, anyone earning up to 15 lakh annually will be subject to 25% tax rate instead of 30%. However, the new tax slabs are only applicable to people who do not opt for exemptions under the tax regime -- including deductions under 80C of PF, LIP, standard deduction, LTC, house rent allowance, minor income exemption, interest deduction on home loans among others.

Essentially, individual tax payers now have the choice to choose between the two tax regimes depending on their requirements.

"The complex tax regime for taxpayers with the slabs rejig. With the optional new regime, taxpayers will have to evaluate what works better. Those committed to long term saving and investing via 80C may be discouraged and this may likely demotivate taxpayers from tax-saving linked investing," said Archit Gupta from Clear Tax.

There will be no tax levied on annual income upto ₹5 lakh. However, if you cross that threshold tax will charged for income above ₹2.5 lakh.



The government’s move to stimulate the economy
As companies look to increase output, job creation will go up or at least arrest job losses taking the pressure off of the country’s unemployment crisis. More jobs, would again, increase purchasing power resulting in a growth cycle.

It could also increase the government’s burden
On the flip side, experts expect lower tax rates to weigh on the exchequer. Tax revenue collection has often been criticized for being inefficient.

However, the ultimate outcome depends on how the cycle of investment and economic growth plays out. Tax revenue could increase if the new tax cuts result in greater compliance over the next two to three years.

This is also an attempt by the government to simplify the tax laws, which are known to be one of the most complicated in the world.

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