Budget 2023: An Attractive New Tax Regime

The New Tax Regime, or the simplified tax regime, was introduced effectively in the financial year 2020–21. While this regime provided for lower tax rates for income up to Rs 15 lakhs, taxpayers had to forgo most of the deductions and exemptions. Where the taxpayers were eligible for deductions in respect of house rent allowance, interest on housing loan, contribution to the Provident Fund, LIC payments, etc., the regular tax regime continued to be beneficial. However, with Budget 2023 proposals, things are slated to change.

The basic exemption limit of Rs 2,50,000 has been increased to Rs 3,00,000. Further, taxpayers with taxable income of up to Rs 5,00,000 were eligible for a tax rebate, effectively ensuring that taxpayers with income up to Rs 5,00,000 did not have to pay any taxes. Budget 2023 proposes to increase this to Rs 7,00,000 under the NTR, reducing the tax liability to NIL and thus resulting in a tax savings of Rs 33,800.

While the tax rates under the NTR were lower, Budget 2023 proposals have further rationalised the same.

Here is a quick comparison of the current and proposed tax rates under the NTR:

Salaried taxpayers are entitled to a standard deduction of Rs 50,000, but this was available only under the regular tax regime. Budget 2023 has proposed to extend the standard deduction benefit to the NTR, making this more attractive to the salaried class. The younger generation of taxpayers, who were not focused on savings and who did not incur house rental expenses, will continue to find NTR attractive and additionally be eligible to avail of the standard deduction.

Here is a quick snapshot of the tax payouts under the current and proposed NTR after considering the standard deduction benefit:

High-net-worth individual (HNI) taxpayers with income over Rs 5 crore were subject to a surcharge of 37%, resulting in a maximum marginal rate of 42.744%, which is significantly high. With the Budget 2023 proposal to slash the surcharge from 37% to 25% under the NTR, the maximum rate dips to 39%. This would make the NTR attractive to HNI as it could have significant tax savings for them.

Further, the finance minister announced that the NTR would be considered as the default tax regime, clearly enhancing its attractiveness to taxpayers and attempting to make this a preferred tax regime over the regular tax regime.

Saraswathi Kasturirangan is a Partner with Deloitte India. Bhavin Rajput is a Director and Mayur Deokar is a Deputy Manager with Deloitte Haskins & Sells LLP.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.