The budget 2023 announcement by the honourable Finance Minister has proposed changes to the personal income tax under the new regime, with the aim of providing relief to the middle-class section of society.
The slab rate is being changed in the first way, where in the tax brackets the slabs are now calculated in slabs of INR 3,00, 000 against the erstwhile INR 2,50, 000.
The benefit of the standard deduction of INR 50,000 is proposed to be extended to the new tax regime for individuals earning income from salary. The rebate under section 87 A has been increased from INR 12,500 to INR 25,000 under the new tax regime. The applicable surcharge for individuals whose aggregate income exceeds INR 5 crore is reduced from 37% to 25% under the new tax regime.
There is no relief on this account because of the restriction imposed on the taxpayer to qualify for the new tax regime.
Let us analyse the tax savings under different scenarios with the help of an illustration:
The income tax was reduced due to the changes in the slab rate but the whole income tax is now exempt under section 87 A, as shown by the above, taxpayers with gross income of INR 7,50, 000 will have to pay a tax of INR 39,000 under the proposed tax regime.
In this illustration, we examined a situation in which the assessee is entitled to tax deductions on account of housing loan and other eligible investments. Income tax payable under the old regime is significantly less than under the proposed new regime and the erstwhile regime.
In this illustration, assuming the tax payer is eligible for the same deduction as illustration 2 but his income is more than INR 5.1 crore, there is a break even between the old regime and the new regime. The reduction in surcharge makes the new tax regime more beneficial.
The honourable Finance Minister stated in her speech that the new tax regime will now be the default tax regime. It is imperative that taxpayers compare their tax liability between the old regime and the new regime based on deductions, and decide or select which regime they prefer to be tax under in the ITR. This option can be exercised every year in case of individuals with income other than business profession.