Budget 2023: Govt looks to encourage move to new income tax regime, with enhanced limit, new slabs

Finance Minister Nirmala Sitharaman, on Wednesday, made several major announcements for personal income tax payers, including new slabs and extending the rebate limit to Rs 7 lakh from Rs 5 lakh. However, most of these changes will be applicable only to those opting the new tax regime and the new tax regime is proposed to become the default, in clear signs of encouragement for the salaried class to move towards it.

“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 in her speech.

In 2020, when the new personal income tax regime was introduced, six income tax slabs were announced starting from Rs 2.50 lakh. The budget this year proposes to reduce the number of slabs to five, with exemption limit to Rs 3 lakh.

So, the new income tax rates are – nil for income up to Rs 3 lakh; 5 per cent for income between Rs 3-6 lakh; 10 per cent for income between Rs 6-9 lakh; 15 per cent for income between Rs 9-12 lakh; 20 per cent for income between Rs 12-15 lakh and 30 per cent above Rs 15 lakh.

Sitharaman says this will provide “major relief” to all tax payers in the new regime.

“An individual with an annual income of Rs 9 lakh will be required to pay only Rs 45,000. This is only 5 per cent of his or her income. It is a reduction of 25 per cent on what he or she is required to pay now, ie, Rs 60,000. Similarly, an individual with an income of Rs 15 lakh would be required to pay only Rs 1.5 lakh or 10 per cent of his or her income, a reduction of 20 per cent from the existing liability of Rs 1,87,500,” said Sitharaman.
The budget also proposes to extend the benefit of standard deduction to the new tax regime, and Sitharaman claimed that each salaried person with income of Rs 15.5 lakh or more will stand to benefit by Rs 52,500.

There was also some relief for those in the highest income tax bracket. Currently, the highest tax rate is 42.74 per cent, among the highest in the world. The proposal is to reduce the highest surcharge rate to 25 per cent from 37 per cent, again in the new regime, which will bring maximum tax rate down to 39 per cent.

The budget also proposed to raise the tax exemption limit on leave encashment of retirement of non-government salaried employees. The current limit of Rs 3 lakh was last fixed in 2002, which will be bumped up to Rs 25 lakh.

The rationalisation of personal income tax structure may lead to raising disposable income for the middle class, particularly younger tax payers and transition the tax payers to the new tax regime with minimal exemptions and lower and simpler tax slabs, feels Suman Chowdhury, chief analytical officer at Acuite Ratings and Research.

“This is expected to increase the net take home for younger salaried employees under the new tax regime as they are unlikely to have a home loan or significant level of investments, which gives benefit under the old regime. This surplus is more likely to end up in consumption and give some boost to overall demand,” he said.

Madhavi Arora, lead economist at Emkay Global Financial Services, also feels the tax benefits have been tweaked to encourage individuals to move towards the new tax regime, and to provide relief to middle class, while maximum marginal rate has also been reduced to 39 per cent from 42.7 per cent to give relief to the highest income strata.

“While the government is foregoing effective revenue of Rs 35,000 crore, this could have a consumption multiplier effect albeit at the margin, in the economy that’s seeing fading consumption growth,” said Arora.

Umesh Kumar, chief investment officer of Samco MF, sees it in a different light and feels the budget’s inclination towards new tax regime will reduce incentive to invest in financial products including mutual funds, equity-linked savings schemes, insurance premium etc. or even the decade-old housing sector incentives for interest payments.

“The budget therefore has rewritten the rules for financialisation of savings in India, which will induce expenditures rather incentivise savings,” said Kumar.

Sunil Damania, chief investment officer at MarketsMojo, though, feels the change in the personal income tax system is a step in the right direction to “put more money in the hands of taxpayers, which will encourage growth.” If that happens, the private sector capital expenditure will also pick up, he felt.