With the Budget 2023, Union Finance Minister Nirmala Sitharaman had a hard task to satisfy all sections of working population in India from a personal tax perspective. Expectations were very high from the common man since it was the last full-fledged Budget for the government before the 2024 Lok Sabha elections.
There are no changes recommended by the FM in the existing tax regime, wherein taxpayers still have the option to claim various deductions such as investment made in provident fund, insurance premium, house rent allowance etc while changes have been proposed in the simplified tax regime. This raises the view on whether the government intends to promote savings or wish to keep the tax system administratively convenient. Tax exemption limit for leave encashment which was fixed way back in 2002 is proposed to be enhanced from Rs 300,000 to Rs 2,500,000, leading to a saving of Rs 660,000 (excluding surcharge and cess) at the highest rate.
In the move to make the simplified tax regime more lucrative, there has been a change in income tax rates and tax slabs, which have been reduced to five as compared to the current six. Standard deduction of Rs 50,000 per annum has now been allowed under the simplified regime. Tax slabs and tax rates under the existing as well as proposed simplified tax regime are given below:
Rebate from full taxes is available for taxable income up to INR 7 lakh, as compared to INR 5 lakh currently. Hence, individuals with salary incomes up to INR 7.5 lakh will be able to claim standard deduction and additional rebate and end up paying no taxes under the simplified tax regime.
Earlier, surcharge applicable for income exceeding INR 5 crores was 37% which is now proposed to be reduced to 25% (under the new tax regime) bringing down the maximum marginal rate to 39%, from 42.74%.
Also Read: Old vs New Tax Regime: How will Budget 2023 benefit taxpayers under both regimes?
The simplified tax regime is proposed to be the default tax regime and individuals will need to specifically opt for older regime if they wish to and intimate their employers well in time.
An illustration given in the chart for tax savings at different income levels (including surcharge as applicable and cess) under the new tax regime after considering standard deduction:
Though there are savings across all income levels under the simplified regime, one has to forego the benefit of claiming various deductions. Hence, taxpayers who do not have high investments or eligible deductions or fall in the income slab above INR 5 crores and have limited deductions, may opt for the new regime.
While the surcharge for the super rich has been reduced under the new regime, it has been proposed to put a cap on the exemption on capital gains from sale of house property and long-term assets and taxing the income from insurance policies.
In so far as long-term capital gains are concerned, the income tax law allows for exemption of long-term capital gains from sale of residential property or other long-term assets, if the same is reinvested in a residential house property. Currently, the exemption is available for the entire amount of capital gain, if the cost of new residential property is higher than the capital gain. HNIs who purchase expensive residential houses claim high exemption leading to low or nil capital gains tax. It is to prevent this, that the Budget has proposed to limit the exemption to INR 10 crore.
With regard to insurance policies, currently, any amount received from the insurance policy is exempt from tax, subject to conditions. As HNIs invest in insurance policies having large premium contributions, it is proposed that proceeds received from life insurance policies (other than ULIPs), taken on or after 1 April 2023, would be taxable as other sources where aggregate premium paid in any year exceeds INR 5 Lakh. Premium paid (to the extent not claimed as a deduction earlier) will be allowed as deduction from total proceeds and the computation mechanism will be prescribed. Any amount received on death of the person continues to be exempted. Similar amendment was also introduced in the Finance Act of 2021 for taxation of sum received under ULIPs if the amount of premium payable for any of the FY during the term of such policy exceeds INR 250,000.
Currently an individual is allowed to claim deduction on interest payable on borrowed capital for acquiring, renewing, or reconstructing a property. In addition, the individual also considers the interest paid as cost of acquisition while computing capital gains on sale of house property. In order to avoid such double deduction of interest paid on borrowed capital, the FM has clarified that interest claimed as deduction is to be excluded from cost of acquisition/cost of improvement upon transfer of the house property and the same rule is to apply to non-individual taxpayers as well.
While the government has tried to make the simplified tax regime attractive by widening the income slabs so that a larger part of population may opt for the same, the Budget does not bring any change in limits for encouraging investments in saving schemes, insurance etc. In a nutshell, while a lot more was expected from this Budget, the proposed amendments should still bring some joy.
(By Deepika Mathur, Director, and Manuj Singla, Manager, Deloitte Haskins and Sells LLP)