BL Explainer. Has the new Income tax regime become more attractive after Budget 2023?

The simplified income tax regime was introduced in the 2020 Budget to simplify the compliances for taxpayers by weaning away deductions and exemptions. In the Budget speech, the Finance Minister indicated that the simplified regime was a step to simplify the income-tax system with 70 of the existing 100 plus deductions/exemptions being eliminated.

It was further proposed that the remaining deductions would also be reviewed and rationalised in future. However, not many taxpayers opted for the simplified tax regime as the regular regime was more beneficial. Thus, in the budget, the finance minister attempted to make the simplified tax regime more attractive by reducing the tax impact and permitting a standard deduction of ₹50,000 from total income.

What are the main changes made to the new IT regime in the Budget?

The finance minister proposed several changes in the new IT regime. It is proposed that the income slabs be reduced from six to five and the basic tax exemption limit be increased to ₹3 Lakh. The rebate under section 87A will be increased to ₹7 lakh from the current level of ₹5 lakhs. Further, standard deduction of ₹50,000 will be introduced for salaried individuals and the reduction of surcharge for total income exceeding ₹5 crore from 37 per cent to 25 per cent. Consequently, the maximum marginal rate would be reduced from 42.74 per cent to 39 per cent.

Has the concessional IT regime now become more attractive compared with the old IT regime based on tax incidence?

With the changes introduced by the finance minister, the new tax regime has become more attractive to taxpayers. Individuals at the income level up to ₹7 Lakh or 7.5 lakh for the salaried class would certainly find the new tax regime more beneficial. However, at the higher levels, one needs to evaluate which regime is more beneficial based on the deductions and exemptions that an individual taxpayer could claim.

The old tax regime will continue to be more attractive for individuals who claim deductions relating to HRA, leave travel concessions, deductions u/s 80C in respect of contributions to PF, PPF, life insurance and interest deduction for housing loans, etc. Thus one has to compute the tax liability in both scenarios and accordingly have to opt for the most beneficial tax regime.

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Do you think that some taxpayers can shift to the new regime due to its simpler structure?

Yes, as highlighted, individuals at income levels up to ₹7 Lakh will have no tax liability in the new tax regime by opting rebate under section 87A while under the regular regime, they would have to pay taxes. Similarly, individuals at an income level beyond ₹5 crore could be benefitted from the new regime due to the lower maximum marginal rate (39 per cent as against 42.74 per cent).

The other taxpayers would have to exercise their choice post-evaluation of their individual circumstances. If taxpayers do have many deductions/reliefs, they may move towards new tax regime due to lower tax rates and avoid year-end documents/investment proof submissions.

Will the new IT regime disincentivise savings by removing the tax breaks on small savings, insurance, pension etc?

Benefits upfront in the form of tax savings was clearly one of the key drivers for the investments. It did create a savings discipline for at least small taxpayers. Under the new tax regime, with no tax benefit extended on savings-based investments, insurance, pension, etc. there may be a decline/dip in the investments.

(The writer is Partner, Deloitte India)

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