Union Minister of Finance Nirmala Sitharaman while presenting Budget 2023 has proposed certain changes to the personal income tax structure for the taxpayers. The proposals aim to help taxpayers lower their tax liability and effectively save more. However, for the government it is an outflow. The FM in her Union Budget 2023 speech says, “the total revenue forgone is about Rs 35,000 crore annually.”
The most important proposal pertaining to individual taxation is making the New Tax Regime as the Default option for the taxpayers.
Under the Old Tax Regime, taxpayers can avail income tax benefits, by investing in specified tax saving investments under various Sections of I-T Act. On the other hand, taxpayers can benefit from the reduced tax rates under the New Tax Regime, but they are not able to take advantage of the majority of income tax deductions and exemptions, such as section 80C or section 80D tax benefits. Taxpayers may, however, still use the deduction allowed by Section 80CCD(2) of the Income Tax Act of 1961 even after choosing the New Tax Regime.
“Alok Agrawal, Partner, Deloitte India says, “The new tax regime has got a great boost by the Budget announcements made by the FM. Taxpayers at both ends of the spectrum will be encouraged under the new regime, as there will be no liability up to annual income of Rs 7 lakh on one hand and surcharge on annual income above Rs 5 crores has been reduced from 37 to 25% at the high-income end.”
To make the new tax regime more attractive for the taxpayers, the Budget 2023-24 proposes a few major changes in the Income Tax Act, 1961. So, in the light of new tax proposals of Budget 2023, should taxpayers opt for the New Tax Regime over the Old Tax Regime?
“The relief has been given, with a nudge to shift to the New Tax Regime. This will certainly put more money in the hands of the consumers and investors. The Old Tax Regime gives concessions based on investments and insurance and tax is levied after giving effect to these deductions. This used to direct the savings to avenues favored by the policy makers. In my opinion, this will not adversely affect the flow into the investments. The investors have evolved and are committing to goal-based investments on their own. The limits under the Old Tax Regime were already getting fulfilled due to housing loan repayment and PF contributions. The adoption of self-propelled investments is evident from continuous monthly flows of over 12,000 crores into mutual funds,” says Bharat Phatak, Director of Scripbox.
The first change proposed in tax laws is related to the income tax rebate. Currently, those with income up to Rs 5 lakh do not pay any income tax in both old and new tax regimes. FM has proposed to increase the rebate limit to Rs 7 lakh in the new tax regime. Thus, persons in the new tax regime, with income up to Rs 7 lakh will not have to pay any tax. Here, it is important to note that those opting to stay with the old tax regime will get a tax benefit of rebate on income up to Rs 5 lakh.
Here’s how income tax rebate work. Under the provisions of section 87A of the Act, a taxpayer having total income not exceeding Rs 5 lakh, is provided a rebate of 100 per cent of the amount of income-tax payable i.e., an individual having income till Rs 5 lakh is not required to pay any income-tax.
From assessment year 2024-25 onwards, a taxpayer whose income is chargeable to tax under the proposed sub-section (1A) of section 115BAC, shall now be entitled to a rebate of 100 per cent of the amount of income-tax payable on a total income not exceeding Rs 7 lakh.
Secondly, the new personal income tax regime currently has six income slabs starting from Rs 2.5 lakh. FM has proposed to change the tax structure in the new tax regime by reducing the number of slabs to five and increasing the tax exemption limit to Rs 3 lakh. In the Old tax regime, the exemption limit stays at Rs 2.5 lakh.
According to the Finance Minister Budget 2023 speech, “This will provide major relief to all taxpayers in the new regime. An individual with an annual income of Rs 9 lakh will be required to pay only Rs 45,000. This is only 5 per cent of his or her income. It is a reduction of 25 per cent on what he or she is required to pay now, ie, Rs 60,000. Similarly, an individual with an income of Rs 15 lakh would be required to pay only Rs 1.5 lakh or 10 per cent of his or her income, a reduction of 20 per cent from the existing liability of Rs 1,87,500.”
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Thirdly, the Standard Deduction limit is to be enhanced from Rs 50,000 to Rs 52,500 under the new tax regime. Each salaried person with an income of Rs 15.5 lakh or more will thus stand to benefit by Rs 52,500. FM in her Budget 2023-24 speech said, “Each salaried person with an income of Rs 15.5 lakh or more will thus stand to benefit by Rs 52,500.
Saraswathi Kasturirangan, Partner, Deloitte India, “The government is actively promoting the new tax regime, which will now be the default tax regime. The basic exemption under this regime has increased to Rs 3 lakh from Rs 2.5 lakh. Individual taxpayers earning up to Rs 7 lakh will not have to pay taxes as compared to the current limit of Rs 5 lakhs. Further, the benefit of standard deduction is also extended under the new tax regime which was not available earlier.”
Opting for a new tax regime will make the income tax filing process much simpler. However, in such a case, you will have to manage your savings on your own without having to lock them in specified investments. As a taxpayer, if you still want to make use of Section 80C and other Deductions and save for long term goals through tax savers, you may opt for the old tax regime. It’s always better to calculate the tax liability under both tax regimes and then take a call. Your financial goals are equally important to be funded through your savings.
