New regime is the new future: Know all the income tax announcements made in Union Budget 2023

The Hon. Finance Minister of India, Smt. Nirmala Sitharaman, presented the Union Budget on 1^st  February 2023. The budget carried on with Govt of India’s much talked about “Amrit Kaal vision”, initiated in the previous budget while trying to balance fiscal consolidation with growth sustenance. 

As the Union Finance Minister herself admitted, personal income tax is the most awaited segment of any Union Budget. In her latest budget announcement, Mrs Sitharaman addressed the personal income tax section by mentioning that she had five major announcements to make. She also stated that these announcements are aimed at benefitting India’s hard-working middle class.

Tax rebate
 

Under the existing rules, people with an income of up to Rs 5 lakh were not required to pay any income tax. This was applicable in both old and new tax regimes. The finance minister proposed in the budget that this rebate limit would be raised to Rs 7 lakh in the new tax regime. 

Accordingly, if you opt for the new regime, you don’t need to pay tax if your income is below Rs 7 lakhs. However, if you opt for the old regime, you will have to pay tax if your income exceeds Rs 5 lakhs. This change gives an advantage to the new regime as a choice. 

Income tax rates
 

In 2020, the finance minister introduced the new tax regime. It had six income slabs starting from Rs 2.5 lakh. In this budget, the new tax regime structure has been changed, which will see a reduction in the number of tax slabs from six to five. Besides, the tax exemption limit under the new regime has been increased to 3 lakhs. 

Let us have a look at the table below that compares the old regime, the new regime and the new regime with the budget 2023 changes.

As can be seen in the table above, the changes will provide major relief to all taxpayers who are opting for the new regime in tax slab. 

If your annual income is Rs 9 lakhs, you will pay only Rs 45,000 under the new regime now. This is 5% of your annual income. Before the changes, the tax liability on the same annual income amounted to Rs 60,000. Thus, it is a 25% reduction in your tax liability. 

Under the existing tax structure, a person with an annual income of Rs 15 lakhs had to pay a tax of Rs 1,87,500. However, with the changes proposed in the budget, there will be a 20% reduction in the tax liability. The revised tax liability will be Rs 1,50,000.

Standard deduction
 

The benefit of standard deduction has been extended to the salaried class, pensioners and family pensioners who opt for the new tax regime. This benefit was earlier not available under the new tax regime. With this introduction, a salaried person with an annual income of Rs 15.5 lakhs or more can gain up to Rs 52,500.

Maximum tax rate
 

In her budget speech, the finance minister pointed out that the highest income tax rate in the country is 42.74%. She said that this is one of the highest tax rates in the world. Accordingly, the budget proposed to reduce the maximum rate of tax. The highest surcharge rate of 37% will be reduced to 25%. 

Existing surcharge rates are:

· Income above Rs 50 lakhs and up to Rs 1 crore – 10%

· Income above Rs 1 crore and up to Rs 2 crores – 15%

· Income above Rs 2 crores and up to Rs 5 crores – 25%

· Income above Rs 5 crores – 37%

New surcharge rates are:

· Income above Rs 50 lakhs and up to Rs 1 crore – 10%

· Income above Rs 1 crore and up to Rs 2 crores – 15%

· Income above Rs 2 crores – 25%

This reduction will be effective in the new tax regime. As a result of this reduction, the new maximum income tax rate in India will be 39%.

Leave encashment
 

The finance minister also proposed to increase the tax exemption on leave encashment drastically from Rs 3 lakhs to Rs 25 lakhs. This is the leave encashment on the retirement of non-government salaried employees. Notably, the exemption was fixed at Rs 3 lakhs in the 2002 budget and has not been tinkered with ever since. The highest basic pay in the government at that time was around Rs 30,000 per month. Thus, this increase in exemption was long overdue.

Default tax regime
 

It has become obvious from the changes that the government is encouraging taxpayers to embrace the new tax regime. Most of the changes made stand to benefit taxpayers who opt for the new regime. Therefore, it was no surprise when the finance minister declared during the budget presentation that the new income tax regime is now recognised as the default tax regime for individuals, Hindu Undivided Families, Association of Persons excluding cooperatives, Body of Individuals and Artificial Juridical Person. A person who has income under the head “Profits and gains from business or profession” and has opted for the old regime can revoke the option only once. After that, the person will continue to be taxed under the new regime. Any other person can exercise the option of the old regime each year. 

She, however, confirmed that citizens opting for the old tax regime will continue to avail of the benefits provided in the said regime. 

Conclusion
 

The regime preference may differ with different levels of income, and you must compare the two tax regimes and the respective tax liability. Also, make sure that you make the most of your tax planning after taking these income tax changes into consideration.

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