Confused about the changes in income tax rules announced in the latest budget introduced in Parliament on 1st February, 2023? We’re breaking it down for you.
If you’re still a little at sea about the changes in income tax rules announced by the Finance Minister recently, here’s everything you need to know at a glance. The six income tax rule changes announced by FM Sitharaman in Budget 2023 are summarised as follows:
Increase in tax rebate limit to ₹7 lakh from ₹5 lakh
This means that individuals with an income less than ₹7 lakh will not have to invest anything to claim exemptions and their entire income will be tax-free, regardless of the amount invested. This will give more spending power to the middle-class as they can now use their entire income without worrying about investment schemes to get exemptions.
New income tax slabs
FM Sitharaman announced changes in the income tax slabs, reducing the number of slabs to five and increasing the tax exemption limit to ₹3 lakh. The new tax rates are:
- ₹0-3 lakh – Nil
- ₹3-6 lakh – 5%
- ₹6-9 lakh – 10%
- ₹9-12 lakh – 15%
- ₹12-15 lakh – 20%
- Above ₹15 lakh – 30%
The new system will simplify the previous six income categories into five. Taxpayers
can still choose the prior regime, and for salaried and pensioners, the standard deduction for taxable income exceeding ₹15.5 lakh is ₹52,500 in the
Additional Reading: Union Budget Highlights 2022
Extension of standard deduction benefit to pensioners
The Finance Minister announced an extension of the standard deduction benefit to the new tax regime for pensioners. Those earning a salary of ₹15.5 lakh or more will benefit from a standard deduction of ₹52,500.
Decrease in maximum tax rate
The maximum tax, including surcharge, will be 39% according to the announcement made by FM Sitharaman during the presentation of Budget 2023. The previous highest tax rate of 42.74% was one of the highest in the world, and the FM proposed reducing the highest surcharge rate from 37% to 25% in the new tax regime, resulting in a decrease of the maximum tax rate to 39%.
Increase in leave encashment limit
Finally, the limit of ₹3 lakh for tax exemption on leave encashment for non-government salaried employees at retirement has not been updated since 2002, when the highest basic pay in the government was ₹30,000 per month. To keep up with the increase in government salaries, the FM is proposing to increase this limit to ₹25 lakh.
New tax regime will be the default regime
The new income tax regime will be the default system. Taxpayers will still have the option to choose the prior regime, but the new system will offer a standard deduction of ₹52,500 for taxable income above ₹15.5 lakhs for salaried and pensioners.
Experts hold that the government is encouraging the adoption of the new tax regime, which has increased the basic exemption limit to ₹3 lakh from ₹2.5 lakh. Individuals with income up to ₹7 lakh will now be exempt from taxes, compared to the previous limit of ₹5 lakh.
In Budget 2020-21, the government introduced an optional tax regime with lower tax rates for those who did not claim specified exemptions and deductions such as HRA, home loan interest, and investments under sections 80C, 80D, and 80CCD. Total income up to ₹2.5 lakh was tax-free under this regime. The current tax slabs range from 5% for income between ₹2.5 lakh and ₹5 lakh to 30% for income above ₹15 lakh. These slabs will be revised as per the Budget announcement, effective April 1st, 2023.
Psst…don’t forget to use our nifty tax calculator to calculate the income tax amount you will be required to pay. Click the button below.