In surveys conducted preceding Union Budget 2023-24, taxpayers had asked for tax cuts and increase in the deduction threshold under Section 80C of the Income-tax Act, 1961, and the interest on home loans, among others. However, the finance minister surprised individual taxpayers by giving benefits only under the new tax regime. Here are some of the changes that will impact the salaried class significantly in FY24.
Tax Rates And Slabs
The tax rates, income slabs and the deduction thresholds for an individual and/or Hindu Undivided Family (HUF) opting for the old tax regime have not been touched. However, to make the new tax regime attractive to taxpayers, both the income slabs as well as the tax rates have been changed.
Thus, all taxpayers opting for the new tax regime would see a reduction in taxes considering that the income slabs as well as the tax rates have been revised. If we compare the tax impact ignoring all deductions and exemptions as well as the surcharge and cess, then a taxpayer having a total income of Rs 15 lakh would now be paying Rs 1.5 lakh as tax under the proposed changes in the new tax regime as against Rs 1,87,500 as it exists now under the new tax regime.
The new tax regime was introduced in FY 2020-21 by providing an option to individuals to pay taxes at the lower rate by forging the majority of deduction. Over the last two years, only few individuals had opted for this regime, since the tax rates were similar under both the regimes and there was a need to forgo the majority of the deductions.
Reduction In Surcharge Rate For HNIs
The highest rate of surcharge for high net-worth individuals (HNIs) having taxable income of more than Rs 5 crore is 37 per cent. This has been reduced to 25 per cent for HNIs under the new tax regime, which is a big relief for taxpayers in this bracket.
This impact would result in the marginal tax rate reducing from 42.74 per cent to 39 per cent, under the new tax regime. However, the marginal tax rate would continue to be 42.74 per cent for those in the old tax regime. Thus, an individual having a total income of Rs 6 crore will save taxes of Rs 22.82 lakh in the new tax regime.
Tax Relief For Low Income Group
Taxpayers in the low income group having a total taxable income up to Rs 5 lakh enjoy a tax rebate of Rs 12,500 and, thus, are not required to pay any taxes. This limit has now been enhanced to `7 lakh for taxpayers in the new tax regime. Previously, a taxpayer in the Rs 5 lakh to Rs 7 lakh bracket would have paid a tax of Rs 33,800 in the new tax regime, which will now be nil.
From FY 2023-24, the new tax regime will be considered as the default tax regime for all individuals. However, the choice to opt for the old tax regime would still be available for an individual.
Since the overall tax would vary based on tax rates and the quantum of deductions and/or exemptions under each regime, an individual would need to evaluate the tax liability under both the alternatives and make appropriate choices.
The finance minister has proposed to increase the exemption limit for leave encashment received by a non-government employee at the time of retirement, resignation and/or voluntary resignation scheme (VRS) from Rs 3 lakh to Rs 25 lakh.
The finance minister has done a fine balancing act of making the simplified tax regime attractive by providing some tax reduction for all taxpayers, but at the same time, she has refrained from extending massive tax breaks. It is now up to the taxpayers to evaluate which regime is most beneficial to them.
The article is authored by Aarti Raote, Partner, Deloitte India, and Vinod Raj, Manager, Deloitte Haskins and Sells LLP.