Budget 2023: Big Income Tax Relief Under New Regime

In her Budget speech, finance minister Nirmala Sitharaman proposed an overhaul of the personal income tax slabs via the Finance Bill, 2023.

Here are the key announcements made by the FM:

Currently, those with income up to Rs 5 lakh don't pay any tax in both old and new regimes. The rebate will be increased to Rs 7 lakh in the new tax regime. Individuals opting for new tax regime, which was introduced in Budget 2020, with an income of Rs 7 lakh will not have to pay any tax at all.

Second change relates to new income tax regime. Now, number of slabs have been reduced to five, and tax exemption has been increased to Rs 3 lakh. New tax rates will be:

• 0- Rs 3 lakh- NIL

• Rs 3- 6 lakh- 5%

• Rs 6-9 lakh- 10%

• Rs 9-12 lakh- 15%

• Rs 12- 15 lakh- 20%

• Above Rs 15 lakh- 30%

"This will provide major relief to all tax payers in the new regime. An individual with an annual income of Rs 9 lakh will be required to pay on Rs 45,000 in tax- this is only 5% of his or her income. It is a reduction of 25% on what he or she is required to pay now. Similarly, an individual with an income of Rs 15 lakh would be required to pay only Rs 1.5 lakh or 10% of his or her income. This is a reduction of 20% from existing liability."

Third change pertains to salaried class and pensioners- The benefit of standard deduction to be extended to the new tax regime. Each salaried person with an income of Rs 15.5 lakh or more will stand to benefit by Rs 52,500.

Fourth change is on highest tax rate which is currently, at 42.74%. This is among the highest in the world. The highest surcharge rate is proposed to be reduced from 37 to 35% in the new tax regime. This will result in reduction of the maximum tax rate to 39%

Lastly, the limit of Rs 3 lakh for tax exemption on leave encashment on retirement of non-government salaried employees was last fixed in 2002. This limit is proposed to be increased to Rs 25 lakh.

The New Tax Regime will become the default scheme, the finance minister said. "However, citizens will continue to have the option to avail the benefit of the old tax regime", the FM said.

Under the extant rules, individual income tax is calculated either as per the Old Tax Regime or the new tax regime. The latter, introduced in Budget 2020 in a bid to simply the tax filing experience, is a flat rate.

Before the changes announced today, the new tax regime has seven tax slabs, under which income progressively attracts a higher tax rate. The first Rs 2.5 lakh is not taxable. Every additional Rs 2.5 lakh attracts a higher rate, starting at 5% and rising by 5 percentage points. All income above Rs 15 lakh is taxed at 30%.

So far, the New Tax Regime has not found many takers primarily because it removed most exemptions and deductions, including the standard deduction of Rs 50,000 and the exemption of house rent allowance. It does, however, allow for a deduction of up to Rs 50,000 towards contributions to the National Pension Scheme.

Under the old tax regime, there are four slabs:

• Upto Rs 2.5 lakh- NIL

• Rs 2.5 lakh- Rs 5 lakh- 5%

• Rs 5 lakh-Rs 10 lakh- 20% tax

• Above Rs 30 lakh- 30%

As things stand, a taxpayer can potentially reduce their taxable income dramatically through deductions and exemptions. The most popular deduction of Rs 1.5 lakh is allowed under Section 80C, for investments in a variety of instruments.

Further, expenses in the form of premiums on health insurance policies, interest on home loans and student loans and donations to charitable organisations are also deductible from taxable income.