Budget 2023 : Decoding the effects of New Tax Regime on your taxes

The Finance Bill 2023, presented by the Honorable FM on February 1, 2023, proposes a series of amendments in the Personal Taxation domain to make the new 115BAC personal tax regime more appealing to taxpayers.

The mandatory forfeiture of various deductions by taxpayers opting for new tax regime u/s 115BAC introduced by the Finance Act 2020 has made the new regime less popular among taxpayers.

The government desires for more individual taxpayers to adopt the new regime in order to simplify tax return filing and assessments, and to achieve this goal, significant amendments to the 115BAC personal tax regime have been proposed in the Finance Bill 2023 as follows:

1. Pay Less, Keep More : Basic Exemption Limit Increased to 3 Lakhs (Tax-Free First 3,00,000), thanks to Streamlined 5 Tax Slab Rates

The new tax regime under section 115BAC has increased the basic exemption limit from 2.5 lakhs to 3 lakhs. Starting from the 2024-25 assessment year, the proposed tax bracket rates for this new regime will apply to individuals, Hindu undivided families, associations of persons (other than cooperative societies), bodies of individuals (incorporated or unincorporated), and artificial juridical persons as follows: 

2. Increase in Limit of Rebate u/s 87A

The limit for rebate under section 87A has been raised from 5 lakhs to 7 lakhs in the new personal tax regime under section 115BAC. The new rebate limit of 25,000 on exempt income of 7 lakhs is an improvement over the previous rebate limit of 12,500 on exempt income of 5 lakhs.

Q If there's no income tax up to Rs. 7 lakhs, why have tax rates been prescribed under the new tax regime?

A In the Budget 2023, increase is in the form of a rebate under section 87A rather than a rise in the basic exemption limit in the tax brackets. Hence, taxpayers who opt for the new regime starting from the assessment year 2024-25 and have an income of up to Rs. 7 lakhs won't have to pay any income tax. However, if their income surpasses Rs. 7 lakhs, even slightly, the rebate under section 87A won't be applicable and the new tax rates will take effect.

For example, if Mr. Ninja earns Rs. 7,50,000, he would not be liable to pay any tax as he would receive a rebate under section 87A and a standard deduction of Rs. 50,000, which would make his tax payable zero. However, if Mr. Ninja earns Rs. 7,50,001, he would not receive the benefit of the rebate under section 87A and would have to pay tax on Rs. 7,00,001 (Rs. 7,50,001 minus the standard deduction of Rs. 50,000).

3. Allowance of Standard Deduction and Family Pension Deduction in the New Tax Regime

The 2023 Finance Bill provides a key change by allowing the standard deduction under section 16(ia) and the family pension deduction under section 57(iia) for salaried individuals in the new tax regime under section 115BAC of the Income Tax Act.

The only exemptions or deductions available under New Tax Regime (from the assessment year 2024-25 onwards) are :

i. Standard Deduction under section 16(ia) (Rs. 50,000)

ii. Deduction for family pension income under clause (iia) of section 57 (Rs.15000 or 1/3rd of the amount received, whichever is less)

iii. Deduction for the amount paid or deposited in the Agniveer Corpus Fund as proposed under subsection (2) of section 80CCH 

iv. Deduction under Section 80CCD (2) for employer's contribution to employee's National Pension System (NPS) account

For clarification on the 15,50,000 limit for claiming the standard deduction and the difference between the actual standard deduction of 50,000 or 52,500, refer the article here :

4. New Tax Regime to be the Default Option

A significant change has been proposed in section 115BAC of the Finance Bill 2023, making the new tax regime the default option. This is a departure from the current setup, where the old regime is automatically chosen and individuals must opt for the new regime by filing an online declaration.

Starting from AY 2024-25, Individuals or HUFs who prefer to remain in the old regime will now need to make a deliberate choice by filing an online declaration in the prescribed form on or before the due date for filing their original tax return under section 139(1) of the Act.

For those with income from a business or profession, their choice of the old regime under section 115BAC will apply for subsequent assessment years once made.

5. Highest surcharge rate reduced from 37% to 25%

In the new personal tax regime under section 115BAC, the highest surcharge rate of 37% on income over Rs. 5 crores has been reduced to 25%. This reduction has resulted in the maximum tax rate being reduced from 42.74% to 39%.

However, for those choosing to remain in the old regime, there is no change in the surcharge rate.

Important Note : There are no changes in the Old Tax Regime.

Still wrestling with the decision of whether to stick with the old tax regime or switch to the new one? Don't worry! We've got you covered with in-depth examples of both options. Check the article here : 

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