Major Tax Reforms in Budget 2023

Amidst rising inflation, taxpayers have been eagerly waiting for the Union Budget 2023 to offer some relief in taxation. As a result, Budget 2023 expectations were around increased deductions under Section 80C, higher deductions for home loan repayment, and more.  

 

Among these Budget 2023 expectations, a popular and most awaited change was related to income tax slabs to push the country towards economic growth. After all, the last change in income tax slabs took place about a decade ago. 

 

Nirmala Sitharaman, Minister of Finance, presented the Budget 2023 on 1st February 2023. Here’s a look into how certain Union Budget 2023 announcements will impact taxation in India.

New Tax Regime to be the Default Regime

Before diving into the impact on taxation, there is an important announcement that taxpayers need to note from the Budget 2023. The income tax regime introduced in 2020, i.e., the new income tax regime, will now be the default regime to be followed. 

 

What does this mean? The new income tax regime was introduced by Nirmala Sitharaman, in the Budget 2020 announcement. This tax regime was primarily introduced to make compliance easy for taxpayers and reduce the tax burden by decreasing tax rates. 

 

However, taxpayers can still choose to pay taxes under the old regime. Apart from this, here is how the proposals by FM in the Union Budget 2023 will impact taxation in India.

Change in Tax Slabs

While the new income tax regime was made the default regime, the FM of India also proposed changes in the limits, tax rates, and the number of tax slabs. According to the Budget 2023, the new income tax slabs proposed are:

The proposed tax slabs stand to offer great relief to taxpayers under the new regime as the basic exemption has been increased to ₹3 Lakhs from ₹2.5 Lakhs. However, this is applicable only to taxpayers who opt for it.

 

In contrast, take a look at what the old regime had in store as well as the new tax regime before the revision as per the Budget 2023. 

Old Tax Regime:

New Tax Regime announced in FY2020:

Increased Tax Rebate Limit

Previously, taxpayers with an annual income of ₹5 Lakhs could enjoy an income tax rebate under section 87A. In the Union Budget 2023, the Finance Minister proposed that this limit be extended to ₹7 Lakhs. 

 

The enhanced limit will offer great benefits to taxpayers like you as you will be able to reduce your tax liability to nil without investing for the sole purpose of claiming a tax exemption. This is because your income will be completely exempt from a tax liability. 

 

The proposed increase in the income tax rebate limit will allow taxpayers in the middle class to hold more consumption power and not worry about locking their funds in various tax-saving investment schemes.

Reduced Maximum Surcharge

Currently, the highest tax rate in the country is 42.744%, which is also among the highest in the world. In the current Union Budget, the Finance Minister proposed that the highest surcharge rate be reduced to 25% from 37%. 

 

This would subsequently bring down the maximum tax rate to 39%. This revision of surcharge and maximum tax rates is greatly beneficial to the taxpayers in the highest tax slab. 

Revised Standard Deduction in the New Regime

This proposed revision benefits salaried taxpayers with an income above ₹15.50 lakh. In the Budget 2023, the Finance Minister proposed that these taxpayers be extended a standard deduction benefit of ₹52,500 under the new tax regime. 

 

This standard deduction offers relief in ultimately reducing your tax liability. For example, if you have an income of ₹15.50 Lakhs, you can avail a standard deduction of ₹52,500. 

 

The deduction puts you in the tax slab of 20% instead of 30%. Even if the tax slab does not change, your net tax liability reduces with this standard deduction. 

Revised Exemption on Leave Encashment 

Lastly, the Budget 2023 brought forth the proposal of increasing the limit of tax exemption on leave encashment on the retirement of non-government employees. 

 

In the Budget 2023 announcement, the FM of India said the limit of ₹3 Lakhs was set in 2002 when the highest basic pay was ₹30,000. To keep the limit in line with the increase in government salaries, the FM proposed that the limit be increased to ₹25 Lakhs.

 

While the above announcements have an impact on personal income tax, there are more announcements that affect other tax fields. Here are Budget 2023 highlights about proposed changes regarding direct taxes:

 

• The benefit of presumptive taxation limit for micro-enterprises and certain professionals will be enhanced to ₹3 Crores and ₹75 Lakhs, respectively

• New co-operatives that commence manufacturing activities till 31st March 2024 can get the benefits of a lower tax rate, i.e., 15%

• The limit for TDS on cash withdrawal will be increased to ₹3 Crores for co-operative societies

• The date of incorporation of new startups to avail income tax benefits will be extended to 31st March 2024

• Agniveer Corpus Fund will be provided with an EEE status

• The relaxation period for startups to carry forward or set off losses will be extended to 10 years from 7 years

• Increase tax collection at source to 20% from 5% on foreign remittances for the purchase of overseas tour program and other purposes (other than medical treatment and education financing) 

• Deduction from capital gains on investment in residential house u/s 54 and 54F will be capped at ₹10 crore

• Maturity proceeds of life insurance policies issued on or after 1st April 2023 with an aggregate premium of above ₹5 lakh will be taxable

With respect to the above proposals, India will forgo a net tax revenue of ₹35,000 crore. With these tax cuts, the rise in disposable income is sure to usher in a sunny future for economic growth.