The financial budget for 2023 has made many changes to the new income tax regime for the financial year 2023-2024, and it has been a source of great reprieve to the tax paying citizens of the country. There are a few significant changes and introductions made in the tax regime, and they shall be applicable for the assessment year 2024- 2025. These changes have been announced with the aim of lowering the income tax outgo and the income tax burden on salaried taxpayers, senior citizens, individual taxpayers and the middle class. Under the new tax regime, the number of tax slabs has been reduced, and deductions have been made available to deductions to salaried persons, pensioners and family pensioners, and deductions for the employer’s contribution to the national pension system account of the employee under Section 80CCD (2) and deduction for the contribution made to Agniveer Corpus fund.
The new income tax regime was brought forth in the year 2020, which allowed the taxpayers to choose from the existing income tax regime or the new income tax regime. Under the old regime, the taxpayers could continue availing the current deductions like, inter alia, Section 80 C, Section 80 D, Section 80TTA or Section 80TTB of the Income Tax Act of 1961 and tax exemptions like HRA or house rent allowance, leave travel allowance (LTA). The taxpayers have the freedom to choose between the two regimes. However, if one decides to pay tax under the new regime, she would have to forego the many deductions and exemptions available under the old tax regime. However, the new tax regime had the advantage of having lower interest rates as compared to the old tax regime. It was announced that the new income tax regime shall be the default regime, but taxpayers will still have the freedom to opt for the old regime.
Under the new tax regime, a taxpayer cannot opt for deductions which are commonly available under the old tax regime. However, post 1 April 2023, every taxpayer will be eligible to claim a standard deduction of ₹50,000 on her salary along with production under Section 80 CCD (2) of the Income Tax Act of 1961. The contribution of the employer to the Tier-1 NPS account can also be deducted under Section 80CCD(2) of the Income Tax Act 1961. The maximum deduction amount that can be claimed in a financial year shall be 10 per cent, along with dearness allowance (DA). Meanwhile, the maximum reduction which is available to employees working for the government is 14% of the basic salary along with the dearness allowance. An individual taxpayer opting for the new tax regime cannot claim any of the exemptions except for the standard deductions and deductions under Section 80CCD(2) of the Income Tax Act of 1961.
Deductions Not Available in the New Income Tax Regime
There are certain deductions which shall not be available if the assess opts for the new tax regime. The deductions which shall not be available under the new Income Tax Regime are as follows:
- Deduction under Section 80C of the Income Tax Act of 1961: The deduction under section 80C of the Income Tax Act of 1961 is the one which is most commonly availed by taxpayers. Any investment which is made to the Employee Provident Fund, Public provident Fund, Life Insurance premium, or principal loan repayment, among other things, shall be part of the deduction. The maximum amount which is available in a financial year under Section 80C of the Income Tax Act of 1961 is ₹ 1.5 lakhs.
- Deductions under Section 80D of the Income Tax Act of 1961: The deduction under Section 80D of the Income Tax Act of 1961 is available to be claimed for any premium which is paid on medical insurance policy. Any assessee can claim a maximum amount of ₹ 25,000 as a deduction for the insurance which is paid for spouse, self and dependent children. Meanwhile, the maximum deduction available to senior citizens is ₹ 50,000.
- Salaried employees can currently take advantage of the leave travel allowance or LTA exemption two times every four years.
- The House Rent Allowance, or HRA, which is often paid as part of their salary to employees. So if a person happens to reside in a rented housing, this can be claimed as exempt from a specific limit.
- The deduction, which was available to taxpayers under Section 80TT of the Income Tax Act of 1961, shall also not be available.
- Deduction under Section 16 of the Income Tax Act of 1961 of the entertainment allowance which is provided to government employees, employment or professional tax shall not be available.
- Any tax deduction for interest paid on housing loans shall not be available. If a property is self-occupied or is lying vacant, any interest paid on a housing loan for the property could be deducted from the income received from the house property, which would have resulted in a loss from the property. To reduce the taxable income of the assessee along with the net taxable obligation, this loss is allowed to be offset against the salary income of the assessee. Section 24 of the Income Tax Act of 1961 provides for this.
- Disability benefits under Section 80DD and Section 80DDB of the Income Tax Act of 1961 shall not be claimable.
- Section 80 E of the Income Tax Act of 1961 prohibits claiming any tax deduction for interest which is paid on a student debt loan.
- Section 80G of the Income Tax Act of 1961 provides for tax deductions for donations which have been to charities. This shall no longer be available.
All other deductions available under Chapter VIA of the Income Tax Act of 1961 under Section 80CCC, Section 80EE, Section 80EEA, Section 80 EEB, Section 80G, Section 80GG, Section 80GGA, Section 80 GGC, Section 80 IA, Section 80 IAC, Section 80 IB, Section 80 IBA shall not be claimable if the assessee opts for the new tax regime.
The financial budget of 2023 made no change to the old regime; however, many introductions and changes have been made to the new regime, which has revamped it and has made it more lucrative for the taxpayers of the country.
Changes in the New Income Tax Regime 2023
As mentioned above, the budget of 2023 introduced some significant changes to the new income tax regime. Discussed below are these changes in detail and how they shall affect the taxpayers.
- Revised income tax slabs
A major revamp has been seen in the income tax slabs rates under the new tax regime for the financial year 2023- 2024. The basic exemption limit has been further increased from the existing ₹2.5 lakhs to ₹ three lakhs. Depending on the age of the taxpayer, the old income tax regime provided for various basic levels of income exemption. The exemption cap for basic income is Rupees 2.5 lakh for taxpayers who are not older than the age of 60. The basic exemption limit for, which is applicable to senior citizens above 60 years of age or more but who are under 80 years, shall be Rupees 3 lakh. Meanwhile, the basic exemption level shall be Rupees 5 lakh for super elderly citizens who are 80 years of age or older.
The number of tax slabs has been decreased from seven to six while eliminating the 25% income tax slab rate. Provided below are the latest income tax labs under the new regime:
- If the annual income is up to ₹ 3 lakhs, then the tax rate is 0%
- If the yearly income is between ₹ 3 lakhs to ₹ 6 lakhs, the income tax rate shall be 5%
- If the yearly income is between ₹ 6 lakhs to ₹9 lakhs, the income tax rate shall be 10%.
- If the yearly income is between ₹ 9 lakhs to ₹12 lakhs, the income tax rate shall be 15%.
- If the annual income is between ₹12 lakhs to ₹15 lakhs, the income tax rate shall be 20%
- If the annual income is more than ₹15 lakhs, the income tax rate shall be 30%
- Revised Rebate Limit
The tax rebate limit has been increased from the existing ₹5 lakhs to ₹ seven lakhs in the new income tax regime for individual and salaried taxpayers. This essentially means that salaried or individual taxpayers with an annual taxable income less than ₹7 lakhs shall be exempt from paying any tax. The tax rebate provided under Section 87A of the Income Tax Act is available only to resident individuals but not to non-resident individuals (NRIs), firms or Hindu undivided family (HUF).
The tax rebate under section 87 A of the Income Tax Act of 1961 is available both under the old and the new income tax regimes. Up until the financial year 2022-2023, the amount of tax rebate which shall be available under both regimes shall be the same. An individual opting for any of the tax regimes for the financial year 2022-2023 shall be eligible for a rebate of Rs 12,500 if the annual taxable income is not more than ₹5 lakh in the financial year.
Post Budget 2023, the tax rebate under Section 87A of the Income Tax Act of 1961 has been increased to ₹25,000 for individuals and salaried taxpayers whose taxable income does not exceed ₹7 lakhs. No such changes have been made to the old income tax regime.
- Revised surcharge amount
A surcharge is an additional tax that is payable over and above the basic applicable tax, and it is to be paid by taxpayers if their income exceeds with the higher income. Taxpayers falling in the higher income bracket are required to pay a surcharge if their income exceeds a certain level.
The highest applicable surcharge rate has been revised in the new tax regime. Formerly, the highest applicable surcharge rate which applied to taxpayers with income exceeding ₹5 Crores stood at 37%. However, the same has been reduced to 25%. Now, every taxpayer whose income exceeds ₹2 Crores shall have to pay a 25% surcharge beginning from 1 April 2023.
- Deductions available in the new tax regime
- Standard deduction
The standard deduction is available to individuals who have, during the financial year, earned an income as “Income from Salaries”. Hence, pensioners and salaried individuals can claim a standard deduction of ₹50,000 from income obtained from their salary or pension.
The standard deduction can be claimed by salaried individuals without submitting any paperwork to their employer for the same. Meanwhile, when the employee calculates tax on salary, she shall automatically take account of the standard deduction.
If the taxpayer is a family pensioner, then a standard reduction of ₹15,000 can be claimed under the new tax regime. The income of the family pensioner will be taxed under “Income from other sources.”
As was mentioned in the budget speech, the standard deduction to salaried individuals of ₹50,000 and deduction from the family pension up to ₹15,000 is allowed old regime currently. It has been proposed that these two deductions shall also be provided under the new tax regime.
- Contribution to NPS made by the employer
If an employer is contributing to the employees’ NPS account, then salaried employees are eligible to claim a deduction for the contribution which has been made from their gross income. A deduction shall be claimed under Section 80CCD(2) of the Income Tax Act of 1961. The maximum amount of deduction which an employee can claim under this head varies for different individuals depending on whether they work in the government sector or private sector. The maximum amount of deduction a private sector employee can claim as a standard deduction shall be 10 % of her salary. Meanwhile, a government employee can claim up to 14% of her salary. Salary here includes basic salary along with the dearness allowance or DA.
For instance, suppose the basic salary of a private sector employee is ₹ 8 Lakh per annum, and the employer is contributing ₹ 60,000 to the NPS account of the employee every financial year. In accordance with Section 80CCd (2) of the Income Tax Act of 1961, an employee shall be eligible to claim a deduction of ₹ 80,000 (10 % of ₹ 8 lakhs). Hence, the employee shall be eligible to deduct the amount of ₹ 60,000, which has been contributed by the employer, into the NPS account of the employee. In contrast, if the employer donated ₹ 1 Lakh into the NPS account of the employee every financial year, the employee shall be eligible to claim a deduction of only ₹ 80,000.
It is also imperative to notice that in case the overall contribution made by an employer in a financial year to the EPF, NPS and superannuation fund is more than ₹ 7.5 lakhs, then the excess amount of contribution shall be taxable in the employee’s hands. Any further interest or any return earned on such excess contribution will also be taxable.
- Any amount which is deposited or paid under the newly proposed provision of Section 80CCH of the Income Tax Act of 1961 to the Agniveer Corpus Fund shall be eligible to be claimed as a deduction from the taxable income by Agniveer. As was mentioned in the Budget 2023 speech, the payment made by Agniveers to the Agniveer Corpus Fund under the Agnipath Scheme of 2022 shall be exempt from being taxed. The deduction while computing the total income shall be allowed when the Agniveer makes the contribution to her Seva Nidhi Account or the same is made by the Central Government.
The budget memorandum mentioned the proposal to insert Section 80CCH to the Income Tax Act of 1961, which shall state that when the assessee is an individual who is enrolled in the Agnipath Scheme of 2022 and consequently subscribes to the Agniveer Corpus Fund either on or before 1 November 2022, then such assessee shall be allowed to claim a deduction of the amount deposited and the amount which has been deposited by the Central Government in the Agniveer Corpus Fund to the account of the Agniveer from the latter’s total income.
The maturity amount which shall be received from the Agniveer Corpus Fund shall also be exempt from taxation.
The budget memorandum further states that every Agniveer shall be required to contribute 30% of his customised monthly Agniveer Package to the Agniveer Corpus Fund of that individual. It is mentioned that the Central Government shall also make a payment to the interest of the subscriber from time to time on the contribution in the account of the individual. Once the Agniveer completes the four-year engagement period as stated, a one time package under the head of ‘Seva Nidhi’ shall also be paid to the Agniveers. The Seva Nidhi package shall comprise of the contribution along with any interest that has been accumulated thereon in addition to the contributions made by the Agniveers.
- Changes in the old Income Tax Regime
There shall be no change in the old income tax regime for the financial year of 2023-2024. The current rate of income tax, along with tax slabs, shall remain to be in effect. The exemptions and deductions that were permitted under the old Income tax regime shall remain the same as well. If the taxable income of the assessee does not exceed ₹ five lakhs per annum, then she shall be eligible for a rebate under Section 87A of the Income Tax Act of 1961.
The budget for the financial year 2023-2024 was released on 1 February 2023, and it provided some reprieve by reducing the income tax burden on salaried taxpayers, senior citizens, individual taxpayers and the middle class. Among the many changes under the new tax regime, the number of tax slabs has been reduced, and deductions have been made available to deductions to salaried persons, pensioners and family pensioners, deduction for employer’s contribution to the national pension system account for the employee under Section 80CCD (2) and deduction for the contribution made to Agniveer Corpus fund with the aim of lowering the income tax outgo and the income tax burden. The rebate limit and surcharge have also been revised. Even though many of the deductions and exemptions available under the old tax regime are no longer available to the taxpayers, there are still certain deductions which the assessee can avail of. The new income tax regime shall be the default regime, but taxpayers will still have the freedom to opt for the old income tax regime. There have been no changes made to the old income tax regime.
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