Rebate Limit, New Income Slabs, Standard Deduction — Understanding What Taxpayers Have In Budget 2023

Individuals earning Rs 7 lakh (and not availing any deductions) were paying Rs 52,500 as taxes in old regime. This has now been reduced to nil in new tax regime

Finance Minister Nirmala Sitharaman presented Narendra Modi government’s last full Budget announcing a host of concessions for the middle class as expected. The middle class which has been reeling under the impact of high inflation, low salary hikes, layoffs has something to cheer. With these announcements, BJP has made an attempt to placate one of its most loyal vote blocks.

The six key announcements pertaining to personal income tax in the Budget are:

Individuals earning up to Rs 7 lakh per annum will not have to pay any tax, under the new tax regime. This limit has been enhanced from the previous Rs 5 lakh per annum.

Individuals earning Rs 7 lakh (and not availing any deductions) were paying Rs 52,500 as taxes in old regime. This has now been reduced to nil in new tax regime. Even if they were claiming deduction of Rs 3.5 lakh under HRA (Rs 1.25 lakh), Section 80C (Rs 1.5 lakh), 80D (Rs 25,000) and standard deduction (Rs 50,000), they would have been paying Rs. 5,000 in taxes in old regime. So, the lower middle class saves anywhere between Rs 5,000 to Rs 52,500 on account of these announcements.

It may be noted that assuming deduction of Rs 3.5 lakh out of income of Rs 7 lakh is on the higher side. So the savings of this segment of lower middle class is likely to be more towards the middle of the range of Rs 5,000 - Rs 52,500, that is Rs 25,000 or so, around Rs 2,000 per month.

Moving forward, the new tax regime will be the default regime. However, citizens can continue to use the old one too.

This is a clear indication that the old tax regime will be phased out in another 2-3 years. What this does is that it simplifies the entire tax structure and tax filing becomes a DIY (Do It Yourself) exercise in the new regime. Additionally, thousands of hours of unproductive work which the HR department of companies in India spend on collecting investment proofs, rent receipts close to a financial year will stop. These savings of time is invaluable and could be used for productive work. All announcements have been only for the new tax regime and nothing for old tax regime.

The tax slabs under the new tax regime have been reduced from 7 to 6.

It simples the tax code and we are still in line with the slabs in economies like US and China which have 6 slabs.

The new slabs are 0 to Rs 3 lakh: Nil, Rs 3 lakh to Rs 6 lakh: 5%, Rs 6 lakh to Rs 9 lakh: 10%, Rs 9 lakh to Rs 12 lakh: 15%, Rs 12 lakh to Rs 15 lakh: 20%, and above Rs 15 lakh: 30%.

An individual earning Rs 9 lakhs per annum will now have to pay only Rs 45,000 as taxes, down from Rs 60,000, thereby saving 25%.

A Standard Deduction of Rs 52,500 will be allowed as a deduction in new tax regime.

The new tax regime had not taken off due to absence of deductions and exemptions. To sweeten the deal and make it comparable if not attractive, a standard deduction of Rs. 52,500 has been announced for individuals with income of Rs 15.5 lakh and above. Under the old regime, standard deduction of Rs 50,000 and professional tax of Rs 2,500 is allowed. An individual earning Rs. 15 lakh and above was earlier paying taxes of Rs. 1.87 lakhs, and will now have to pay only Rs. 1.5 lakh in taxes, saving 20%.

The highest surcharge levied has been reduced significantly from 37% to 25% in the new tax regime.

As a result the effective tax rate on highest income slab with income above Rs 2 crore, which is currently is 42.74% that includes all surcharges, will come down to 39%. So the super rich earning Rs. 2,00,00,001 was earlier paying Rs. 85.48 lakhs will now have to pay only Rs 78 lakhs, thereby saving 9%.

The loss to the exchequer is Rs 35,000 crore on account of these announcements, that is just 4.3% of the total income tax collection of Rs. 8.15 lakh crore of personal income tax collections in FY22-23.

Old tax regime still attractive for individuals with home loan & income less than Rs 15 lakh

For individuals who have a home loan, they could still want to continue with the old tax regime as they are entitled to a Rs. 2 lakh deduction for interest on home loan.

For example let’s say an individual earns Rs 15.5 lakh, in the new tax regime he/she will have to pay Rs 1.5 lakh as taxes, effective tax rate of 10%. In the old regime he/she could claim deduction of 80C (Rs 1.5 lakh), 80D (Rs 25,000), home loan interest (Rs. 2 lakh), Standard Deduction (Rs 50,000) totalling Rs 4.25 lakh. In this case taxable income is Rs 11.25 lakh, with tax liability of Rs 1.5 lakh. So tax liability is same.

So, if an individual has a home loan, and has an income of less than Rs. 15.5 lakh, then in that case it is attractive to opt for old tax regime. In case of income higher than Rs. 15.5 lakh, the tax incidence is likely to be at similar levels, essentially neutral.

Amitabh Tiwari is a SEBI Registered Investment Advisor.

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