Budget 2020 and How It Affects Me

I am sure you already know everything you need to know about the budget by now. There are hundreds of articles covering every aspect in details. Now the question really is — how much does it affect you? Since everybody’s situation is different, their incomes and tax deductions are different, there isn’t much advice that I can give. This is one of those times when I throw the clichéd answer “it depends”. So instead, I thought I will pen down how it affects me.


But first, lets rewind and understand what happened in the budget. It seems to me that the government wants to introduce the direct tax code (DTC) soon and this budget was sort of a stepping stone. Each new government has been mulling over the introduction of direct taxes, but no one was brave enough to do it. The main problem as I understand is because DTC wants to do away with all kinds of deductions and increase the tax slabs. Increasing the tax slabs is a welcome change, but many may not like the removal deductions. For one, the government may lose some of the revenue if the tax slabs are too wide. And the fiscal deficit is already in a bad condition. On the other hand there will be hue and cry from the tax payers if the slabs are not wide enough for them to save taxes which they would have otherwise saved with deductions. Moreover ELSS fund houses, LIC agents and a whole lot of people selling products based on tax savings will not like it. So what can a Finance Minister do in this situation? Well, introduce a new but optional tax system which does away with most of the deductions.


Now both parties can be happy. People like me and other retired people who don’t need deductions (no home loan, HRA, PF etc) can go for new tax system, while the rest can continue with the old system. But I have a feeling that the old system will not last long if this government continues to be in power 😉


While I did say I could go with the new tax system, I actually will not. The thing is that my gross income will be less than Rs. 6.5 lakhs, which means the old system taxes me less than the new one. How? Well, in the old system I could take the Rs. 1.5 lakh Section 80C deduction by the way of ELSS investments. So my net income will be Rs. 5 lakhs or less. Since there is no tax for income up to Rs. 2.5 lakhs, my taxable income will be Rs. 2.5 lakhs or less. Tax at 5% on Rs. 2.5 lakhs is Rs. 12,500. Now, taking the Section 87a rebate of Rs. 12,500, I don’t have to pay any taxes at all!


If I go with the new tax system, I will have to pay Rs. 37,500 in taxes. The only way I can match the old tax system is if my gross income is less than Rs. 5 lakhs. So for now at least, until my gross income exceeds Rs. 6.5 lakhs, the old system is more tax efficient as long as I continue to invest Rs. 1.5 lakhs in ELSS (which I intend to do). But in future when my income exceeds Rs. 6.5 lakhs for some reason, I may switch to the new tax system. Individuals can choose between the new and old tax system every year. The income tax department even launched a simple calculator that will tell you if you will save more in the old tax system or the new one.


The budget also abolished the dividend distribution tax (DDT) on dividends paid to shareholders. For most, it just makes the growth mutual funds more attractive if you are in the higher tax bracket. But for me, it is actually beneficial because as I mentioned earlier, I fall in the zero percent tax bracket. So I would not have to pay any tax on the dividends.


Other than that there isn’t much in the budget for me really. And yet, it was the longest budget speech 🙂


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