Budget 2023-24: How New Tax Regime To Impact Middle-Class Taxpayers

Zita relies on a calculator on the income tax portal, be it for year-end annual investment proof submission to her employer or the tax declaration at the beginning of the tax year. She uses it to see if the new or old tax regime is beneficial. While the old regime initially seemed attractive with multiple deductions and exemptions, it has not overweighed the reduced tax rates available in the new tax regime. She was keenly waiting for this Budget to see if she could simply move over to the new tax regime (NTR). Budget 2023 has not disappointed her.

The finance minister has proposed to increase the taxable threshold from Rs 2,50,000 to Rs 3,00,000 for taxpayers opting for the new tax regime (NTR). Further, the Budget has also proposed to extend the benefit of rebates for individuals opting for NTR so long as their total income does not exceed Rs 7 lakh. Presently, the rebate is available only for resident taxpayers under the existing tax regime in cases where the total income does not exceed Rs 5,00,000 per annum.

Furthermore, the rates are simplified with fewer income slabs—5 per cent, 10 per cent, 15 per cent, 20 per cent, and 30 per cent. It is also expected to bring considerable savings for the middle-income group. A taxpayer with, say, Rs 15, 00,000 income, is expected to save income tax of Rs 37,500 in the NTR (Rs 1,87,500 Vs. Rs 1,50,000) as per the Budget proposal. Needless to say, the tax outflow would have been considerably higher (Rs 2,62,500) in the old tax regime.

What is more interesting is the introduction of a standard deduction for NTR, which resembles the taxation typically seen in the West, with fixed rates and fixed deductions easing up the compliance process. Presently, under this regime, only conveyance allowance (to meet official duties), transport allowance for the physically challenged, daily allowance on tour or transfer on official duty, and additional deduction for employee contribution to the New Pension Scheme are allowed as deductions for individuals. With the proposal of a standard deduction of Rs 50,000, NTR may cover up for the practical deductions missed thus far by this group of tax persons. 

The surcharge is reduced from 37 per cent to 25 per cent for income exceeding Rs 5 crore. However, this proposal does not mean that many benefits are provided for high-net-worth individuals (HNI). The Budget has set limits for capital gain exemption in case of investment in a residential house. As against the NIL limit at present, the Budget proposes to set Rs 10 crore to curb claiming of huge deductions by HNI, defeating the intention of this exemption. Also, proceeds from the insurance policy with a premium exceeding Rs 500,000 per annum will be taxable if received during the life of the assured. 

Zita now understands that exemptions or benefits are aligned with the intention for which they are introduced. She is glad that her wish list is fulfilled, while other taxpayers availing deductions and exemptions may not harbour the same sentiments. This is because most proposals aim to benefit the taxpayers in NTR, and little was covered for taxpayers in the existing tax regime. 

Zita is also happy that this Budget, which is also themed on empowering women, has introduced a one-time small savings scheme called Mahila Samman Savings. She can deposit up to Rs 200,000 for a tenure of two years which fetches her a fixed interest of 7.5 per cent with a partial withdrawal option.

Just as every coin has two sides, it is time to slide over with the trend to start saving efforts and time through the ease of compliance, less documentation, digital adoption, faster processing, and a special savings scheme.

Sudhakar Sethuraman is a partner with Deloitte India, and Kavitha Jagadeesan is a senior manager with Deloitte Haskins & Sells LLP.