Union Budget: 2023-2024 – Income Tax Rates – Analysis

Union Budget: 2023-2024 – Income Tax Rates – Analysis -Dr. S. Vijay Kumar Highlights: Revised New Tax Regime: • The basic exemption limit has been hiked to Rs 3 lakh from 2.5 lakh under the new tax regime. • New tax regime to become the default tax regime. However, citizens can opt for the old tax regime. • No tax on income up to Rs 7.5 lakh a year in new tax regime (with inclusion of standard deduction). • To attract more number of tax payers (employees) Rs 50,000 standard deduction has been introduced under the new regime. Hence, an individual having gross income of Rs 7.5 lakh can claim standard deduction and bring the taxable income to Rs 7 lakh in order to pay nil tax under the revised new tax regime. • Govt proposes to reduce highest surcharge rate from 37% to 25% in new tax regime income in case of 5 crore INR in the new tax regime. • Those earning up to INR 7 lakh annually are entitled to a rebate, , which was Rs. 5 lakh earlier under Section 87A. • An individual or HUF taxpayer may opt for the new tax regime based on their specific situation and sources of income. Switching to the new tax regime can be done either on a year-on-year basis or only once. However, the frequency mostly depends on the source of income during the year. • In the case where an individual or HUF has income from a business or profession, once the option to avail new tax rates for a financial year has been exercised, the new rates shall apply for subsequent years. However, the law provides such taxpayers’ one single option of switching back to the old tax regime. This switch-back option is available only once in a lifetime unless the taxpayer ceases to have any income from a business or profession.

Deductions/exemptions to be forgone while opting for new tax regime: • Leave travel allowance (LTA) • House rent allowance (HRA) • Children education allowance • Standard deduction on salary • Deduction for professional tax • Interest on housing loan • Deduction for specified investments or expenses under Chapter VI-A such as: – deduction under Section 80C towards contribution to public provident fund, repayment of principal on housing loan, children’s school fees, life insurance premium, etc. – other deductions towards medical insurance premium, interest on education loan, etc. Old Tax Regime: • No changes in the Slab Rates. • For individuals below the age of 60 years, the basic exemption limit is Rs.2.5 lakh. • For senior citizens (between 60 and 80 years), the basic exemption limit is Rs.3 lakh. • For super senior citizens (80 years or more), the basic exemption limit is Rs 5 lakh. Standard Deduction up to Rs. 50,000 is allowed. • 5% tax rebate u/s 87A is available. • Senior Citizens now can save up to 30 lakh (Which was earlier 15 lakh only) to avail exemption of 1.5 lakh in the year of saving. Deductions/exemptions Allowed Under Old System: Tax exemption removed in insurance policies with premium over Rs 5 lakh. • Leave travel allowance (LTA) • House rent allowance (HRA) • Children education allowance • Standard deduction on salary • Deduction for professional tax • Interest on housing loan • Deduction for specified investments or expenses under Chapter VI-A such as: – deduction under Section 80 C up to 1.5 lakh towards contribution to public provident fund, repayment of principal on housing loan, children’s school fees, life insurance premium, Tax Saving Mutual Funds etc. – other deductions towards medical insurance premium, interest on education loan, etc. General Rules: • If an individual or HUF does not possess income from a business or profession, the selection can be made on a year-on-year basis. • For individuals with salaries, the employer is required to withhold tax before the payment of the salaries. • The employee is, however, required to inform the employer regarding their preferred tax rates. • An employee may choose between old and new tax regimes at the beginning of the year and intimate the employer, or at the time of joining new employment during the year. However, at the time of filling the personal tax return, the employee can change the tax regime. For example, at the beginning of the year, an employee opts for the new tax regime and the employer deducts tax based on slab rates under the new tax regime. However, during the year they make certain tax-deductible investments like contribution to provident fund, payment of medical insurance premium, etc., and at the time of filing the income tax returns (ITR), they realize the old tax regime is more beneficial to them. In such a situation, they have the choice to opt for the old tax regime while filing the tax return though the employer had withheld taxes based on the new tax regime. Conclusion: Since the eligible deductions, sources and quantum of income differs individual to individual, one rule cannot be applied to all. Taxpayers will need to evaluate and compare the tax liability under both regimes and then decide on which to opt for. In case a taxpayer has investments in tax-saving instruments, pays premiums on life or a medical insurance policy, children’s school fee, home loan principal repayment, etc., and avails the benefit of the deduction for HRA, LTA, etc. it may be more beneficial to opt for old tax regime since the benefit of deduction/exemption can be availed in the old tax regime. -------------------