The biggest takeaway on the personal taxation front in Budget 2023 was the renewed impetus on the new tax regime. Out of the five tax relief measures that Union Minister of Finance Nirmala Sitharaman announced, four were meant specifically for the new tax regime.
This, effectively, means that the government is trying to attract more taxpayers towards the new tax regime. However, taxpayers will still have the option to continue with the old tax regime.
The Bias Towards New Tax Regime
Anecdotally, few taxpayers, especially those in the higher tax brackets, opted for the new tax regime, given that it does not offer deduction and exemption benefits to the taxpayer.
For 2022-23, anyone earning up to Rs 7 lakh would have to pay no tax if the person was availing of the Rs 1.5 lakh deduction benefit under Section 80C and standard deduction of Rs 50,000. The new tax regime compared poorly, as people earning up to only Rs 5 lakh had to pay no tax, after factoring in the Rs 12,500 tax rebate, according to detailed calculations that Deloitte did for Outlook Money for the financial year 2022-23 (see more at bit.ly/3XSOYhR).
“Currently, those with income up to Rs 5 lakh do not pay any income tax in both the old and new tax regimes. I propose 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,” said Sitharaman in her Budget statement.
It is important to note that the provision has been made specifically for the new tax regime.
The second major impetus to the new tax regime was raising the exemption limit to Rs 3 lakh, while reducing the number of tax slabs. Again, it does not seem this exemption limit will be available to the old tax regime.
The third and one of the most significant changes that gives the new tax regime an edge is the introduction of standard deduction, which was hereto only available under the old tax regime.
“Each salaried person with an income of Rs. 15.5 lakh or more will thus stand to benefit by Rs 52,500,” said Sitharaman.
Even the relief on surcharge for the higher tax brackets is meant for the new tax regime.
“I propose to reduce the highest surcharge rate from 37 per cent to 25 per cent in the new tax regime. This would result in reduction of the maximum tax rate to 39 per cent,” Sitharaman said.
The Bias Against Old Tax Regime
In announcing tax relief measures only for the new tax regime, Sitharaman dashed all hopes of a hike in the deduction limit under Section 80C of the Income-tax Act, 1961.
The limit has remained the same for nearly a decade. It was in 2014 that then Union Minister of Finance Arun Jaitley raised the limit from Rs 1 lakh to Rs 1.5 lakh.
There was no announcement on any changes in the deduction limits under other heads as well, such as health insurance under Section 80D or relief on the interest payment on housing loans.
The fact that Sitharaman steered clear of tinkering with any benefits under the old tax regime raises the question whether the government is in the mood to phase it out eventually.
Also, the future of investments that were being purely sold for the purpose of giving tax deduction benefits to taxpayers also hangs in the balance.