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Rebates to slabs: Budget's key changes in Income Tax regime explained

This move indicates that the old regime will slowly be wound up

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Persons in the new tax regime with annual income up to Rs. 7 lakh will not pay any tax at all
Bindisha SarangKarthik Jerome Mumbai
4 min read Last Updated : Feb 02 2023 | 12:06 PM IST
Union Finance Minister Nirmala Sitharaman announced several changes to the income tax regime in her Budget speech. The changes are “meant primarily for the hardworking middle class”, she said. Here are some of the changes: Rebate under section 87A has been raised, income tax slabs have been reduced, and the highest surcharge has been cut under the new tax regime. A standard deduction has been introduced in this scheme in case taxable income is higher than Rs 15.5 lakh.

Ankit Jain, partner, Ved Jain & Associates, says: “The government is focused on simplifying taxation for individuals by promoting the new tax regime. This regime streamlines the taxation process by eliminating complex deductions.”

Vivek Jalan, partner, Tax Connect Advisory, says: “The intention of the government is very clear that in the future the new tax scheme without exemptions will stay.”

New tax regime the default

Sitharaman announced that the new income tax regime would be the default henceforth. From April 1, you have to opt for the old tax regime at the beginning of the financial year.

Rebate limit raised

At present, those with annual incomes of up to Rs 5 lakh do not pay any tax under the old or new regimes. The rebate limit has now been raised to Rs 7 lakh in the new tax regime.

Jain says, “While the rebate limit under the old tax regime remains unchanged at Rs  5 lakh, individuals are still eligible to claim deductions for tax-saving investments of up to Rs 1.5 lakh under Section 80C and Rs 50,000 towards new pension scheme (NPS). With these two deductions, an individual with an income of Rs 7 lakh can still pay no tax under the old regime.”

Slabs reduced

The number of slabs have been reduced under the new tax regime. Jalan says, “The threshold limit of slabs has gone up, and a number of slabs have gone down.” The tax exemption limit has been increased to Rs 3 lakh. The new tax rates will be as follows: No tax would be levied on income upto Rs 3 lakh; income from Rs 3 lakh to Rs 6 lakh will be taxed at 5 per cent; Rs 6-9 lakh at 10 per cent; Rs 9-12 lakh at 15 per cent; Rs 12-15 lakh at 20 per cent; and above Rs 15 lakh at 30 per cent.

Maneet Pal Singh, partner at IP Pasricha & Co, said: “This move makes it attractive for the individual middle-class taxpayer. It is expected to leave more disposable income in the hands of the consumer.”

There are no changes to the old tax regime.

Standard deduction

For the salaried and pensioners, the benefit of standard deduction has been extended to the new tax regime. Nikhil Varma, managing partner, MVAC, says, “The standard deduction of Rs 52,500 will accordingly be over and above the basic exemption limit available to a taxpayer. The increase from Rs 50,000 to Rs 52,500 will give further respite to taxpayers.”

Suresh Surana, founder RSM India, says, “Deduction from family pension up to Rs 15,000 shall also be available under the new regime.”

Maximum tax rate

The government has reduced the highest surcharge rate from 37 per cent to 25 per cent in the new tax regime. This will result in a reduction of the maximum tax rate to 39 per cent. No change in surcharge is proposed for those who opt to remain under the old regime.

Leave encashment at retirement

The limit of Rs 3 lakh for tax exemption on leave encashment upon retirement of non-government, salaried employees has been increased to Rs 25 lakh.

Things to consider

So which regime should you choose? The new scheme has less paperwork. Jalan recommends a shift to the new scheme. Since the new tax regime eliminates the requirement for individuals to make investments, it frees up cash.

Though the government has made the new tax regime more attractive, many taxpayers committed to housing loan payments, social security contributions, and health insurance premiums will still opt for the old one. Ridhima Bhatia, chartered accountant, Taxmann, says, “The benefits of deductions foregone in the new regime outweigh the lower tax, compelling taxpayers to continue with the old regime.”

Taxpayers should compare their tax liabilities in both regimes before deciding which one to opt for. “[The government] making the new regime the default may also hint towards the old regime slowly being wound up,” says Sameer Jain, managing partner, PSL Advocates & Solicitors.



Topics :Nirmala SitharamanIncome taxBudget 2023Union Budget

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