Saadharan Kumar was your regular average guy. He had a regular family of wife & two kids and lived in a regularly rented apartment.
He goes to a regular 9 to 6 job and earns a salary of Rs.18 lakh per year. Like any other person, he also receives a House Rent Allowance of Rs.2,40,000 per annum. He also contributes to Employee Provident Scheme @ 12% of his salary. Thus far, he has saved Rs.10 lakh in his name and about Rs.6 lakh in his wife’s name which provides him with an average interest of about 6% per annum.
Come the 1st of every month, Saadharan Kumar is perturbed by the huge rent he has to pay! And, the Rent agreement is due for renewal and the landlord is likely to seek a 10% increase.
He also constantly ponders about the dream that he and his wife Saamanya had of moving into their own house.
But that dream gets shattered each time he sees his bank statement and realizes that he pays 30% of his income in rent and income tax.
It was another such day when Saadharan Kumar was sitting dejected on a park bench. His bank statement in one hand and property brochures in the other, hoping against hope to find a way to realize his dreams.
Just then his old friend Chanakya, who was out on his evening run, spotted him staring into oblivion, miserable and lonely.
Chanakya approached him to understand what was wrong. Saadharan could not control his emotions after seeing his old friend and sharing his cause of despair.
Chanakya suggested that the Union Budget has brought some changes in the tax regime and he will be more than happy to help him to figure out if it can be worked out to Saadharan’s benefit.
Later that night, Saadharan went over to Chanakya’s place and they sat down to understand the tax working proposed by the new budget and noted that it proposes multiple slabs of lower tax rate if he forgoes exemptions and deductions that he is presently eligible for.
Chanakya drew the following table of Saadharan’s tax working under the new regime and old regime :
Table 1.0
New tax regime from F.Y.2020-21
Old regime
Salary other than HRA
1,800,000
1,800,000
HRA (In the new regime, no exemption, in the old regime, rent paid over 10% of salary is exempt)
240,000
180,000
Standard Deduction
(50,000
Taxable salary
2,040,000
1,930,000
Bank Interest @ 6% on 10 Lakh
60,000
60,000
Provident Fund Contribution – 80C
(1,50,000)
Taxable Income
2,100,000
1,840,000
Tax calculation
2.50 l – 5.00 l – 5%
12,500
12,500
5.00 – 7.50 – 10%
5.00 – 10.00 – 20%
25,000
100,000
7.50 – 10.00 – 15%
> 10.00 – 30%
37,500
252,000
10.00 – 12.50 – 20%
50,000
12.50 – 15.00 – 25%
62,500
> 15.00 – 30%
180,000
Total Income Tax
367,500
364,500
Cess 4%
14,700
14,580
Total Tax Incidence
382,200
379,080
Saadharan Kumar finds that he does not stand to gain from the new tax regime and would stick to the old regime with a max payout of Rs.3,79,080.
Saadharan Kumar glances through the tax calculations and is again perturbed over the 2 major outflows viz., of house rent and income tax which aggregates to about Rs.6.20 lakh!
Chanakya who has an avid interest in financial matters and current affairs, informs Saadharan Kumar about the Government’s initiatives to help the common man acquire a house of his own. Chanakya informs him about the increase in housing loan interest deduction which was earlier Rs.2 lakh and now an additional deduction of Rs.1.50 lakh is being given under a new section -80EEA.
They discuss that in Delhi NCR, he can get a comfortable 2 BHK house for about Rs.45 lakh. Chanakya suggested that the savings in his wife’s name can meet any contingencies and Saadharan can put in his savings of Rs.10 lakh as a down payment and seek a housing loan of Rs.35 lakh. Chanakya introduced him to a helpful online EMI calculator. EMI for a loan term of 20 years at an interest rate of 8.2% on Rs.35 lakh would work out to approximately Rs.29,700, ie. a payout of Rs.3,56,400 in a year.
Chanakya calculates the tax computation for Saadharan after the housing loan :
Table 2.0.
New tax regime from F.Y.2020-21
continue old regime
Total Salary
2,040,000
2,040,000
Standard Deduction
(50,000)
Taxable Salary
2,040,000
19,90,000
Interest on housing loan u/s 24
(200,000)
Provident Contribution u/s 80C
(150,000)
Addl interest u/s 80EEA*
(84,300)
Taxable Income
2,040,000
1,555,700
Tax calculation
2.50 l – 5.00 l – 5%
12,500
12,500
5.00 – 7.50 – 10%
5.00 – 10.00 – 20%
25,000
100,000
7.50 – 10.00 – 15%
> 10.00 – 30%
37,500
166,710
10.00 – 12.50 – 20%
50,000
12.50 – 15.00 – 25%
62,500
> 15.00 – 30%
162,000
Total Income Tax
349,500
279,210
Cess 4%
13,980
11,168
Total Tax Incidence
363,480
290,378
*Working based on conditions stipulated: property value Rs.45 lakh, loan amount Rs.35 lakh, first house, size 60 sq. mt.
Saadharan Kumar was overjoyed! Without the Housing Loan, in Table 1, the tax was working out to Rs.3,79,080. After the housing loan, in Table 2, the tax liability got reduced to Rs.2,90,378/- ie. a tax saving of Rs.88,702/-! He double-checked Chanakya’s calculations and he was correct!
Saadharan Kumar compared the total savings vis-à-vis the EMI liability:
Tax before Housing Loan
3,79,080
Tax after Housing Loan
2,90,378
Tax Saving
88,702
Add: Rent Saving
2,40,000
Total Savings
3,28,702
EMI liability 29,700 x 12
3,56,400
Additional yearly burden
27,698
Or
2,300 per month
And lo ! with just an additional payout of Rs.2,300 per month, which in any case he would have had to shell out on lease renewal, he could gift a secure and permanent house for his family!
As for his interest in Rs.60,000 foregone on his bank deposit, Chanakya made Saadharan realize that the appreciation of the house will more than compensate for the interest loss! Even at 5% appreciation, he gets Rs.2.25 lakh against Rs.60,000!
Saadharan Kumar’s joy knew no bounds and thanked Chanakya to help him chart the path to fulfil his long-cherished dream!
Chanakya was a modern-day Chanakya and helped Saadharan evolve into Asaadharan by being his Guiding Light!
