Major Boost to New Tax Regime; Tax Slabs Tweaked

In a major boost to the New Tax Regime, the Finance Minister Nirmala Sitaraman, in Union budget 2023, announced 5 major announcements related to the personal income tax, but all under the new regime structure.

1.Increase in rebate limit. The government has increased the rebate limit to Rs 7 lakh from the existing Rs 5 lakh a year. “Currently, those with income up to Rs 5 lakh do not pay any income tax in both old and new tax regimes. I propose to increase the rebate limit to Rs 7 lakh in the new tax regime. Thus, persons in the new tax regime, with income up to Rs 7 lakh will not have to pay any tax,” said Sitharaman while presenting Budget 2023 in parliament today.

2. Reduction in tax slabs: In the budget, FM Sitharaman reduced the number of tax slabs in the new tax regime to just five from the existing six, with the lowest rate being 5 percent and highest 30 percent. With this change, the tax exemption limit also stands increased to Rs 3 lakh from existing Rs 2.5 lakh.

3. Standard deduction for salaried and pensioners. While the salaried class was availing the benefit of standard deduction in the old tax regime, it has now been extended to salaried and pensioners opting for the new tax regime too. With this, each salaried person with an income of Rs 15.5 lakh or more thus stands to benefit by Rs 52,500.

4. Reduction in surcharge. With the imposition of surcharge of 37 per cent on over and above the tax rate, the maximum tax rate goes up to 42.74 percent. The Union budget 2023 has capped this to 25 percent, thereby limiting the maximum tax rate to 39 percent.

5. Increase in tax exemption on leave encashment. Non-government salaried employees who want to avail leave encashment on retirement can now take exemption up to Rs 25 lakh as regards to the earlier limit of Rs 3 lakh. According to the government, the move was necessary as the limit was set when the highest basic pay in the government was mere Rs 30,000.

According to industry experts, the announcements made in the budget clearly hinted at giving fillip to the new tax regime, which lagged behind the old tax regime ever since it was introducted by the governement. “It is clear the government is working towards making the new tax regime more attractive with perhaps the intention of phasing out of the old regime,” says Archit Gupta, Founder and CEO, Clear Tax.

New tax regime

The new income tax regime or the alternate concessional tax regime was introduced two years ago with six income tax slabs starting from Rs 2.5 lakh. This was expected to prove useful for individuals who were not in a position to invest and claim deductions. However, it didn’t find many takers. At present, self-employed individuals can make the shift from the new tax regime to the existing tax regime once during the lifetime, but salaried individual could switch between the two regimes each year.

While making the announcement, the FM said that the government wants to make the new income tax regime the default tax regime but citizens can continue to opt for the old one.