Dheeraj Jandial
Finance Minister Nirmala Sitharaman announced changes in income tax slabs under the new tax regime, in Budget 2023. The changes announced on February 1, 2023, will become applicable from April 1, 2023, for FY 2023-24 once the proposals are passed by Parliament.
The income tax slabs were last changed in 2014, when the personal tax exemption limit was revised, too. While the 2020 budget introduced an optional new income tax regime, which found few takers, the Budget-2023 has announced changes in the income tax slabs in the new tax regime. The changes in the income tax slabs have been made to make it more attractive for individual taxpayers.
The Budget 2020 introduced a new optional tax regime under section 115BAC giving individuals and HUF taxpayers an option to pay income tax at lower rates.
Based on the amendments proposed in the Union Budget-2023, the new tax regime has been made as a default one, and the tax payers will have to select the old tax regime if they wish to subscribe to it.
Currently, a taxpayer with income from business or profession is required to file Form 10IE for the purpose of opting for the new tax regime. This form was introduced in October, 2020. However, as per the amendments proposed by the Union budget 2023 in the new tax regime, from 2023-2024 onwards taxpayers will be required to opt for the old tax regime. The manner of opting for the old tax regime will be prescribed by the tax department in due course.
Old v/s New Tax Regime - Which is Better?
The Budget-2023 has caused a lot of confusion among taxpayers regarding the choice between the old and new tax regimes. The government has introduced various incntives in the Budget-2023 to encourage the adoption of the new regime.
These changes shows that the government's intention is to have taxpayers transition to the new regime and eventually phase out the old one. As on present, though the new regime is now the default tax regime, the old tax regime will continue to exist.
NEW TAX REGIME – 5 KEY CHANGES:
The new tax regime was introduced in Budget-2020wherein the tax slabs were altered and taxpayers were offered concessional tax rates. However, those who opt for the new regime cannot claim several exemptions and deductions, such as those for HRA, LTA, 80C, 80D and more. because of this the new tax regime did not have many takers. The government in Budget 2023 introduced 5 key changes to encourage taxpayers to adopt the new regime. They are:-
Higher Tax Rebate Limit: Full tax rebate under Section 87 A of the Income Tax Act, 1961 on an income upto Rs 7 lakhs has been introduced. Whereas, this threshold is Rs 5 lakhs under the old tax regime. This means that taxpayers with an income of up to Rs 7 lakhs will not have to pay any tax at all.
Streamlined Tax Slabs: The tax exemption limit has been increased to Rs 3 lakhs and the new tax slab structure has been introduced to benefit taxpayers.
Standard Deduction and Family Pension Deduction:
Salary Income: The standard deduction of Rs 50,000/- which was only available under the old regime has now been extended to the new tax regime as well. This along with the rebate, makes Rs 7.5 lakhs as your income as tax-free.
Family Pension: Those receiving family pension can claim a deduction of Rs 15,000/- or 1/3rd of pension, whichever is lower.
Reduced Surcharge for High Net Worth Individuals : The surcharge rate on income over Rs 5 crores have been reduced from 37% to 25%. This move will bring down their effective tax rate from 42.74% to 39%.
Higher Leave Encashment Exemption: The exemption limit for non-government employees has been raised from Rs 3 lakhs to Rs 25 lakhs, an 8-fold increase.
Default Regime: Starting from FY 2023-2024, the new income tax regime will be set as the default option. If you want to continue using the old regime, you must submit a form at the time of return filing. You will have the option to switch between the two regimes annually.
ADVANTAGES OF OPTING FOR NEW TAX REGIME:
The benefits of the New Tax structure are as follows :-
a) The new tax regime is tailored to new investors and individuals who have only recently began their careers, as their income has only recently begun.
b) The present tax regime is still in effect and the taxpayer has the option of choosing between the old and new tax regimes that best fit your needs. The government has not imposed any penalties for failing to convert to the new tax regime.
c) The new tax regime allows taxpayers to invest their money without any preconceived limitation. There are no mandatory rules and regulations governing your investment pattern under the new program.
d) With numerous tax slabs, you, the taxpayer, will fall into the one that best matches your annual income.
LIMITATIONS OF OPTING FOR THE NEW TAX REGIME
With no exemptions, your total taxable income will be larger than it was under the previous tax system.
OLD TAX REGIME:
The old regime is the tax system that prevailed before the introduction of the new regime. Under this regime, the government has provided Indian taxpayers approximately 70 exemptions and deduction choices through the addition of sections to the Income Tax Act throughout the years, allowing them to reduce their taxable income and hence pay less tax. The deductions allow you to lower your tax obligation by investing, saving, or spending on specific items. Section 80C is the most popular and generous deduction, allowing you to reduce your taxable income by up to Rs.1.5 lakh.
ADVANTAGES OF OPTING OLD TAX REGIME
The old income tax regime instilled a savings culture in individuals over time by requiring investments in specific tax-saving instruments. It leads to saving for future events such as marriage, schooling, home purchase, medical, etc.
LIMITATIONS OF OLD TAX REGIME
The limitations of the old tax regime are as follows:
a) The investment lock-in period hurts liquidity.
b) Current level of consumption owing to committed amount of investments.
c) There are a limited number of tax-saving investments available.
d) Evidence retention of deductions claimed is a hassle.
e) Not advantageous for taxpayers with nil or lower transactions eligible for tax deductions.
COMPARISON OF TAX SLAB RATES UNDER OLD AND NEW REGIMES
Slab Old Tax Regime Slab Rates for FY 22-23 (AY 23-24) New Tax Regime Slab Rates
Resident Individuals & HUF < 60 years of age & NRIs Resident Individuals & HUF > 60 to < 80 years Resident Individuals & HUF > 80 years Before Budget 2023
(until 31st March 2023) After Budget 2023
(From 1st April 2023)
₹0-₹2,50,000 NIL NIL NIL NIL NIL
₹2,50,000 -₹3,00,000 5% NIL NIL 5% NIL
₹3,00,000-₹5,00,000 5% 5% (tax rebate u/s 87A is available) NIL 5% 5%
₹5,00,000-₹6,00,000 20% 20% 20% 10% 5%
₹6,00,000-₹7,50,000 20% 20% 20% 10% 10%
₹7,50,000-₹9,00,000 20% 20% 20% 15% 10%
₹9,00,000-₹10,00,000 20% 20% 20% 15% 15%
₹10,00,000-₹12,00,000 30% 30% 30% 20% 15%
₹12,00,000-₹12,50,000 30% 30% 30% 20% 20%
₹12,50,000-₹15,00,000 30% 30% 30% 25% 20%
>₹15,00,000 30% 30% 30% 30% 30%
DEDUCTIONS AND EXEMPTIONS ALLOWED UNDER OLD AND NEW TAX REGIMES
Here is a comparison between the deductions and exemptions available under the new and the old tax regime:
Particulars Old Tax Regime New Tax regime
(until 31st March 2023) New Tax Regime
(From 1st April 2023)
Income level for rebate eligibility ₹ 5 lakhs ₹ 5 lakhs ₹ 7 lakhs
Standard Deduction ₹ 50,000 – ₹ 50,000
Effective Tax-Free Salary income ₹ 5.5 lakhs ₹ 5 lakhs ₹ 7.5 lakhs
Rebate u/s 87A 12,500 12,500 25,000
HRA Exemption ✓ X X
Leave Travel Allowance (LTA) ✓ X X
Other allowances including food allowance of Rs 50/meal subject to 2 meals a day ✓ X X
Standard Deduction (Rs 50,000) ✓ X ✓
Entertainment Allowance Deduction and Professional Tax ✓ X X
Perquisites for official purposes ✓ ✓ ✓
Interest on Home Loan u/s 24b on self-occupied or vacant property ✓ X X
Interest on Home Loan u/s 24b on let-out property ✓ ✓ ✓
Deduction u/s 80C (EPF|LIC|ELSS|PPF|FD|Children’s tuition fee etc) ✓ X X
Employee’s (own) contribution to NPS ✓ X X
Employer’s contribution to NPS ✓ ✓ ✓
Medical insurance premium – 80D ✓ X X
Disabled Individual – 80U ✓ X X
Interest on education loan – 80E ✓ X X
Interest on Electric vehicle loan – 80EEB ✓ X X
Donation to Political party/trust etc – 80G ✓ X X
Savings Bank Interest u/s 80TTA and 80TTB ✓ X X
Other Chapter VI-A deductions ✓ X X
All contributions to Agniveer Corpus Fund – 80CCH ✓ Did not exist ✓
Deduction on Family Pension Income ✓ ✓ ✓
Gifts upto Rs 5,000 ✓ ✓ ✓
Exemption on voluntary retirement 10(10C) ✓ ✓ ✓
Exemption on gratuity u/s 10(10) ✓ ✓ ✓
Exemption on Leave encashment u/s 10(10AA) ✓ ✓ ✓
Daily Allowance ✓ ✓ ✓
Transport Allowance for a specially-abled person ✓ ✓ ✓
Conveyance Allowance ✓ ✓ ✓
BREAKEVEN THRESHOLD FOR DECIDING BETWEEN NEW v/s OLD TAX REGIMES
To simplify this complication, a comprehensive 'BREAK-EVEN POINT ANALYSIS', has been done by experts, so as to guide and assist the taxpayers, in making good and informative choice and decision of opting for their most optimum tax regimes.
Break- Even Point Analysis between New & Old Personal Tax Regime
Income in INR Less: Standard Deduction in INR Net Income in INR Tax Liability as per New Regime Additional Deductions (over & above standard deduction) required in Old Regime for Break Even When will New Personal Tax Regime will be More Beneficial?
700000 50,000 65,0000 0 1,50,000 At an income level of Rs 7 lakh and less, an individual will benefit only in new regime.
800000 50,000 7,50,000 35,000 1,38,500 At an income level of Rs 8 lakh, an individual will benefit in new regime if the available deductions (other than standard deduction) are less than Rs. 1,38,500
900000 50,000 8,50,000 40,000 2,12,500 At an income level of Rs 9 lakh, an individual will benefit in new regime if the available deductions (other than standard deduction) are less than Rs. 2,12,500
10,00,000 50,000 9,50,000 52,500 2,50,000 At an income level of Rs 10 lakh, an individual will benefit in new regime if the available deductions (other than standard deduction) are less than Rs. 2,50,000
12,50,000 50,000 12,00,000 90,000 3,12,500 At an income level of Rs 15 lakh, an individual will benefit in new regime if the available deductions (other than standard deduction) are less than Rs. 3,12,500
15,00,000 50,000 14,50,000 1,40,000 3,58,000 At an income level of Rs 15 lakh, an individual will benefit in new regime if the available deductions (other than standard deduction) are less than Rs. 3,58,000
15,50,000 50,000 15,00,000 1,50,000 3,75,000 At an income level greater than Rs 15 lakh, an individual will benefit in new regime if the available deductions (other than standard deduction) are less than Rs. 3,75,000
16,00,000 50,000 15,50,000 1,65,000 3,75,000 At an income level greater than Rs 15 lakh, an individual will benefit in new regime if the available deductions (other than standard deduction) are less than Rs. 3,75,000
Concluding Remarks
In attempting all the possible permutations and combinations of income levels of an individual and HUF assessee and the specified deductions so available, and a break-even point, between the old regime and the new regime of personal tax, in all the income levels, in terms of the availability of specified deductions, has been worked out above.
Thus, these detailed computations will surely serve as a ready referencer for all the individual/HUF assessees and the tax professionals, to make informed and most appropriate choices of their tax structures in order to optimise their taxes.
Based on the above Break-Even Point Analysis, clearly, our Hon'ble Finance Minister has succeeded in making the New Personal Taxation Regime u/s 115BAC more attractive and beneficial for the individuals & HUFs vis-à-vis the old regime and for the upcoming FY 2023-24, this new regime is definitely going to be a hit among the masses, as no body will wish to block their hard earned income for non-commensurate tax benefits, in the current scheme of the things.
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