New v/S Old: Comparing New Income Tax Regimes
It’s no secret that tax laws and regulations can be complex. And trying to make sense of changes to the personal income tax regime can be especially daunting.
Fortunately, the Indian government recently introduced a new personal income tax regime for individual taxpayers in Budget 2020, with an updated version of the same regime being announced in Budget 2023. This new tax regime is intended to simplify taxes for all taxpayers by helping them save on their total tax outgo without compromising on their overall financial goals.
But, as with any new law or regulation, there may be aspects that are not immediately clear. In this article, we’ll dive into all the details you need to know about the revised new income tax regime, including the slabs and rates applicable under it, who stands to benefit the most, and how Nirmala Sitharaman has proceeded with it in Budget 2023. So stay tuned!
What Was the Old Income Tax Regime?
Before introducing the new income tax regime in Budget 2020, the Indian taxation system was based on a series of income tax slabs and corresponding tax rates. These slabs ranged from 0% for incomes up to Rs. 2.5 lakhs to a staggering 30% for incomes over Rs. 10 lakhs per annum. It should also be noted that surcharges were applied on top of these rates, ranging from 10% to 37%, depending on income and other factors.
Under this old income tax regime, most taxpayers were required to pay taxes if their total taxable income was more than Rs. 2.5 lakhs per annum. Thus, those who earned higher salaries and had bigger properties had to pay heavier taxes as compared to those who earned a low salary or did not have any property, etc.
What Are the Changes in the New Tax Regime?
The new tax regime, announced in Budget 2020, has been revised for the Financial Year 2021-2022 by Finance Minister Nirmala Sitaraman in Budget 2023. The new income tax slab and rates are set in such a way that the overall tax burden can be reduced for individuals if they choose to opt for the new tax regime instead of the old one.
In terms of changes to the new income tax regime, here are some of the differences between it and the old one:
- Tax rates have been reduced for most taxpayers who opt into the new regime. There are now seven slabs ranging from 0% to 30%.
- The surcharge rates have been revised: those with an annual income between 10 to 50 lakhs will now pay a 15% surcharge instead of 25%.
- Finally, there is a reduction in long-term capital gains (LTCG), which is applicable only if taxpayers invest in stocks and equity shares listed on recognized stock exchanges.
- In case physical gold is converted into electronic gold there will be no CGT charged as of April 1, 2023.
- Additionally, as of April 1, 2023, non-government employees will be exempt up to Rs 25 lakh in leave encashment allowance. Previously, it was only Rs 3 lakh.
In essence, those who can benefit from lower taxes should certainly consider opting into this revised tax regime when filing their returns this financial year.
What the New Income Tax Slabs and Rates are?
In the revised new tax regime announced in Budget 2023, the income tax slabs and rates have been modified. According to this new regime, the income tax slabs are 0%-5%, 10%-15%, 20%-25%, and 30%. It is worth noting that those earning up to ₹2.5 lakhs annually will be exempted from paying income tax.
The surcharge amount has also changed under this new regime, with the maximum rate being 22% for that earning above ₹15 crores a year.
For that earning between ₹10-12 lakhs annually, their tax rate will be reduced from 30% to 25%. That earning between ₹12-15 lakhs annually will also benefit from a reduced rate of 25%. For that earning above ₹15 lakhs annually, their rate will remain at 30%.
Overall, these changes are beneficial to taxpayers, as they have the potential to reduce their annual tax burden significantly. As Finance Minister Nirmala Sitaraman said while introducing this revised new income tax regime in Budget 2023 – “It is our duty and responsibility to give them (taxpayers) relief.”
How Much Surcharge Is Payable?
The surcharge payable under the revised income tax regime for individual taxpayers for Financial Year (FY) 2023-24 is as follows:
- No surcharge if income is up to 50 lakhs
- 10% Surcharge if income is between 50 lakh to 1 Cr
- 15% Surcharge if income is between 1 Cr to 2 Cr
- 25% for above 2 Cr to 5cr or more than that.
The surcharge amount is calculated on the basis of the tax payable. In the case of individuals below 60 years of age, the calculations are based on their taxable income as well as their applicable tax rate. On the other hand, individuals above 60 years of age will have to calculate their surcharge amount based on their total taxable income. This calculation does not include any other deductions or exemptions that may be available to them.
Therefore, those individuals who are in the highest tax slab will have to pay a 15 percent surcharge on their taxable amount, which reduces their overall effective tax rate from 30 percent to 25 percent. The new income tax regime makes it beneficial for some higher-income earners as it helps reduce their overall tax burden significantly.
What Did the Finance Minister Propose in Budget 2023?
In Budget 2023, Finance Minister Nirmala Sitaraman proposed a further revision to the new personal income tax regime as introduced in Budget 2020. The revised new tax regime was proposed to simplify the filing process and reduce the burden of taxes for individuals.
The main changes proposed in the revised tax regime are:
- To make the new tax regime more appealing, the basic exemption limit has been raised from 2.5 lakh to 3 lakh.
- The highest tax rate of 30% will be levied on earnings in excess of Rs 15 lakh.
- The surcharge rate for individuals earning more than 5 crores has been reduced from 37% to 25% under the new tax regime.
The tax slabs under the new income tax regime were tweaked in the Union Budget 2023. There will be no tax on earnings up to Rs 3 lakh. Income over Rs 3 lakh but less than Rs 5 lakh will be taxed at 5%. Income tax will be levied at a rate of 10% on earnings exceeding Rs 6 lakh but not exceeding Rs 9 lakh.
Who are Most Affected by the New Regime?
In a positive way the new regime has affected:
- Individuals with income up to Rs 7 lakh
- Individuals with higher incomes whi we unable to cliam tax benefits of atleast Rs 4.5 lakh
- Those who were required to maintain records for exemption claim are benefited as now there is no need for such records
In a negative way the new regime has affected:
- Those who claim a large number of exemptions are better off under the old tax regime.
- The new tax regime makes no attempt to encourage taxpayers to save, such as through ELSS or PPF schemes.
With the new income tax regime, high-income earners may have to pay more tax compared to the old regime. However, even with the new regime, taxpayers can take advantage of various deductions and exemptions to reduce their tax liability. The new regime offers more flexibility to taxpayers, especially those with low incomes, to set the rate of taxes according to their individual needs and financial situation. At the same time, the new regime creates more haze compared to the old regime. Ultimately, the revised new tax regime is expected to provide more benefits to individual taxpayers.