In the Union Budget 2023, the Finance Minister has made five announcement to reduce the tax burden on the middle class. Four of these announcements relate to the simplified tax regime under Section 115BAC, which was introduced three years earlier as a simplified alternative to the convoluted system with numerous exemptions and deductions. The fifth announcement grants tax relief for leave encashment.
The simplified tax regime offers a lower tax rate for individuals and Hindu Undivided Families (HUFs), but with limitations on certain exemptions and deductions. Despite the government’s effort to simplify the tax system, its adoption has been limited due to the absence of popular deductions such as life insurance premiums, medical insurance premiums, housing loan interest, house rent allowances, and standard deductions.
The 2023 budget seeks to make the new tax regime more appealing by introducing the following changes:
- The new tax regime is now accessible to other entities such as AOP and BOI.
- The maximum exemption limit and tax brackets in the new tax regime have been revised. The new maximum exemption limit has been increased to Rs 3,00,000 and for every additional income of Rs 3 lakh, the next tax slab will apply – Nil, 5%, 10%, 15%, 20%, and 30%. The highest tax slab of 30% will still apply to income above Rs 15,00,000.
- Residential individuals opting for the new regime will receive a rebate under section 87A if their total income is up to Rs 7 lakh, meaning that their tax liability will be zero.
- The new regime also allows for the standard deduction of Rs 50,000 for the first time for employees who choose the new regime.
- The highest slab of the surcharge rate of 37% has been reduced to 25% for individuals earning income above Rs 5 crore. The old regime continues to apply the surcharge rate of 37% to income exceeding Rs 5 crore.
- The new tax regime will become the default tax regime, meaning that if an employee does not specify which scheme they prefer, the tax will be calculated and taken out based on the new tax regime. Non-salaried individuals will need to file a form to choose the old tax regime, otherwise the tax will be calculated based on the new regime by default.
Despite these changes, the new tax regime may not be favorable for all taxpayers, especially those claiming popular deductions such as Section 80C, 80D and interest on housing loan. The tables below demonstrate the break-even points of taxable income for the new tax regime.
(By CA Dipen Mittal and CA Ashish Gupta, Taxmann)