FM plays Santa: Zero tax on income upto ₹7 lakh under the new regime

• Tax saved by individuals in higher income brackets will result in the amount getting channelised into both consumption and savings, thereby boosting overall growth in the economy.
  
• A salaried person with an income of ₹15.5 lakh or more will stand to benefit by ₹52,500 under the new tax regime.
  
• New tax regime to be the default tax regime to encourage its adoption.

FM Nirmala Sitharaman has brought a smile on the faces of Indian taxpayers by announcing some measures in Budget 2023, a year before the 2024 Lok Sabha elections. The tax proposals would mean that the Government forgoes ₹37,000 crore in direct taxes, but these tax benefits are expected to indirectly boost consumption and growth.

However, most of these tax measures will apply to the new tax regime that was introduced in Budget 2020. Hence if to be eligible for these benefits you cannot claim deductions like 80C, HRA. Let us take a look.

Persons with income up to ₹7 lakh will not pay income tax: The rebate under Section 7A of the new income regime has been hiked to ₹7 lakh.

“This means that you pay 5% tax between 3-6 lakh i.e ₹15,000 and pay 10% tax between ₹6-7 lakh ie ₹10,000. The Government will refund the total tax paid i.e ₹25,000, so effectively you pay zero tax,” says Anant Ladha, founder, Invest Aaj For Kal, a financial advisory firm.

“With lower taxes and zero tax at ₹7 lakh, disposable income will rise easing out inflation pressure on the middle class. This is a big relief to them,” says Archit Gupta, CEO, Clear, a fintech company.

Number of tax slabs reduced to 5 in the new tax regime: The income tax slabs under the new income tax regime will be as follows. It is to be noted that the basic tax exemption limit has been hiked from ₹2.5 to ₹3 lakh.

Here are the new tax slabs:


Extension of standard deduction to the new tax regime: The budget has allowed a standard deduction of ₹52,500 a year in the new tax regime. Each salaried person with an income of ₹15.5 lakh or more will thus stand to benefit by ₹52,500. Standard deduction is a base amount that is not subject to tax, in addition to the basic exemption limit. In the old tax regime it remains the same.

Maximum tax rates reduced to 39% from 42.74%: The budget has also proposed to reduce the highest surcharge rate from 37% to 25% under the new tax regime, which would result in reduction of the maximum tax rate to 39%. This means that people who earn more than ₹5 crore will save around 3% tax.

New tax regime to be the default tax regime: To provide a boost to the new tax regime the Government has made it the default tax regime. Taxpayers can opt for the old tax regime. Earlier, it was the other way around.

"The new tax regime has got a great boost by the Budget announcements made by the FM. Taxpayers at both ends of the spectrum will be encouraged under the new regime, as there will be no liability up to annual income of ₹7 lakh on one hand and surcharge on annual income above ₹5 crore has been reduced from 37 to 25% at the high-income end," says Saraswathi Kasturirangan, Partner, Deloitte India.

However, Akhil Chandna, Partner, Grant Thornton Bharat says, “Large segment of salaried taxpayers claiming deduction for HRA, LTA and other deductions for health insurance premium, interest on education loan, etc would still be better off under the old tax regime.”

Further rationalization in the new tax regime would be required to encourage the complete move from the old tax regime to the new tax regime, and we can expect more such changes going forward.

SEE ALSO:
From camera lens to cigarettes: what got cheaper and more expensive after Budget 2023
Income tax bonanza, capex push emerge as the stars of Budget 2023-24