The Union Budget for the forthcoming financial year was put forth a few months ago. One of the major highlights of the budget this year was the raft of changes introduced the general income tax framework of the country. These changes involve a lot more than just a few changes in rates and are a lot more pervasive and permanent. If understood and leveraged correctly, these changes have the potential to make a huge difference in the amount of taxes we pay. They would also make the process of making key decisions related to filing our taxes a lot easier.
These changes also show that the government is trying to send us some very important messages going into the forthcoming years. It is therefore important for us to understand the changes introduced to the tax structure and the messages the government is trying to send through them. This would help us make the most appropriate choices that would help us optimise the amount of taxes we ultimately pay and our finances as a whole. So today I am going to dissect each of the changes introduced in the income tax framework and talk about the implications they would come with for all of us. I will also decode the messages the government is trying to send us through these changes.
The biggest change made to the income tax framework by Budget 2023 is the fact that the new tax regime introduced in 2020 has been modified in terms of the slab rates and made the default choice for individuals. This means that unlike before, the option to be taxed under the old regime will have to be opted for by the individual. Those who do not specify their choice would automatically be taxed under the new regime. Also the Basic Exemption Limit under the new regime has been increased from Rs 2.5 lakh to Rs 3 lakh.
This means that anyone who opts to be taxed under the new regime need not file their returns if their taxable income for the year does not exceed Rs 3 lakh. Accordingly, the various slab rates applicable under the new regime from 1st April 2023 are laid out in the graphic that follows.
Until now, income upto Rs 5 lakh every financial year was tax free owing to the rebate under Section 87A of the Income Tax Act. But as per the proposals of budget 2023, the rebate under Section 87A has been increased from Rs 12,500 to Rs 25,000 under the new regime coming into force from 1st April 2023. This effectively means that income upto Rs 7 lakh every financial year would be exempt from tax. It is important to remember that this provision amounts to an increase in the amount of rebate and not a change in the basic exemption limit. Therefore individuals who wish to benefit from the increase in rebate must file their income tax returns on time.
The standard deduction of Rs 50,000 has also been extended to salaried professionals and pensioners under the new regime. When the new tax regime was initially rolled out in 2020, the government had made it clear that the ultimate plan was to completely phase out the old regime and bring everyone under the new regime over a period of time. The proposals of this year's budget have given us yet another indication that the government is continuing to move in that direction. This has led many to ask the question as to whether or not to shift to the new regime right away or to hold back on making the shift for a while longer.
Broadly speaking, those who are currently under the old regime and enjoy exemptions and deductions in excess of Rs 4.25 lakh from various sources such as Section 80C and others may consider the option of continuing with the old regime. Those who have already shifted to the new regime may continue to stick with the new regime, since the proposals that would come into force from 1st April 2023 would reduce overall tax payments under the new regime by upto Rs 52,500. This has been laid out in the graphic that follows.
It must be remembered that only salaried professionals with no business can switch freely between either regime. Those who have business income and are being taxed under the new regime can switch back to the old regime should they opt to do so. But once they switch to the old regime, they cannot switch back to the new regime unless there is a financial year in which they have zero business income. The last of the major changes to the income tax framework saw the effective tax rate for individuals falling under the highest tax bracket being slashed from 42% to 39%. The maximum rate of surcharge was also reduced from 37% to 25%.
Clearly the government is moving forward with its intentions to phase out the old tax regime and make the new regime pervasive. Most people would have a lot to gain from the tweaks made to the new regime, especially the young salaried class. But the biggest nuance of the new regime that must be borne in mind is the fact that most of the popular deductions under the series of sections from Section 80C to 80U would not be available under the new regime. This is indicative of a very clear message from the government, which must be clearly understood by us.
The message being that while the government is putting more money into the hands of the taxpayer, it would no longer incentivise them to save taxes through qualifying investments. The onus of making investments and handling the broader sphere of their finances would therefore predominantly fall on the shoulders of the taxpayer. Individuals would therefore need to brace themselves for this increased level of responsibility (potentially with professional help) while welcoming the benefits bestowed upon them by Budget 2023.