Union Minister of Finance Nirmala Sitharaman made a slew of announcements related to personal income tax in her Budget Speech in Parliament on February 1, 2023, with a major emphasis on the new tax regime.
Overall, she announced five big changes in personal income tax.
1] Tax Limit Increase In New Regime: Now, individuals with a taxable income of Rs 7 lakh will not have to pay any tax under the new tax regime. Earlier, this limit was Rs 5 lakh. Previously, those with income up to Rs 5 lakh under the old tax regime also could avail benefits of up to Rs 7 lakh by virtue of the Rs 1.5 lakh available as deduction under Section 80C and Standard Deduction of Rs 50,000.
2] Tax Slabs: She also announced new tax slabs under the new regime: They are as follows
For incomes up to 0-3 lakh, the tax will be nil. Earlier, this limit was Rs 2.5 lakh, and now it has been increased to Rs 3 lakh.
For the Rs. 3-6 lakh limit, the tax rate is 5 per cent, for Rs 6-9 lakh, it is 10 per cent. For Rs 9-12 lakh, it is 15 per cent, and for Rs. 12-15 lakh, it is 20 per cent. For incomes above Rs. 15 lakh, it is 30 per cent.
This, she said, would provide major relief to tax payers in the new tax regime. Accordingly, those with a taxable income of Rs 9 lakh will now have to pay a tax of Rs 45,000 as against Rs 60,000 earlier. This is only 5 per cent of the individual’s income, a reduction of 25 per cent from what he/she is required to pay now.
Likewise, an individual with a taxable salary of Rs 15 lakh will now have to pay a tax of Rs 1.5 lakh or 10 per cent of the income as against Rs 1,87,500 now, a reduction of 20 per cent.
3] Benefits To Salaried Class And Pensioners: She added that the Standard Deduction of Rs 50,000 to salaried individuals, and deduction from family pension up to Rs 15,000, which is currently allowed only under the old regime, will now be available under the new tax regime as well.
Thus, every salaried individual with an income of Rs. 15.5 lakh or more will thus stand to benefit by Rs. 52,500, she said.
“It is proposed to allow these two deductions under the new regime also,” she said.
4] Reduction In Tax Surcharge: The highest tax rate of 42.74 per cent has also been reduced in this budget. The highest surcharge of 37 per cent has been reduced to 25 per cent in this new budget, she said. This would reduce the maximum tax rate from 42.74 per cent to 39 per cent.
However, no change in surcharge has been proposed for those who wish to continue under the old regime.
She also announced that the new tax regime will be the default tax system, but tax payers can still continue with the old tax regime.
5] Exemption On Leave Encashment: Lastly, the limit of Rs. 3 lakh for tax exemption on leave encashment on retirement of non-government salaried employees has been increased to Rs 25 lakh. This was last fixed in 2002, when the highest basic pay in the government was Rs. 30,000 per month, she said. This has been done in keeping with the increase in government salaries, she added.
Says Sudhakar Sethuraman, partner, Deloitte India: “This budget looks promising for middle-class taxpayers with enhanced slab limits. Revisiting the leave encashment exemption in line with prevalent salary levels is much appreciated. One has to be prepared for how the new tax regime will be focused going forward.”
Sethuraman added that another point on better targeting of tax concessions and exemptions has been fixing the limit for capital gain exemption in the case of residential houses at Rs 10 crore.
“The limit is proposed to be fixed on the exemption for proceeds from insurance policies. With eased up compliance and simplified processes, the budget can be said to meet the hard-working middle-class taxpayers to a considerable extent,” he says.
Alok Agarwal, partner, Deloitte India added that the new tax regime has got a great boost from the announcements made by Sitharaman.
“Taxpayers at both ends of the spectrum will be encouraged under the new regime, as there will be no liability up to an annual income of Rs 7 lakh on one hand and surcharge on annual income above Rs 5 crore has been reduced from 37 to 25 per cent at the high-income end,” he adds.