The response to the new tax system that applies to individual taxpayers has not pleased the government. In the budget that was presented on February 1st, 2023, the administration suggested a number of provisions to ensure that an increasing number of taxpayers would be subject to the new tax regime. Let’s talk about the suggested actions.
There are proposals to include more tax payer types
Only individual Indian residents and Hindu Undivided Families (HUF) had the option of the new tax regime in the past. The finance minister has suggested that the new tax system be made available to everyone who is subject to the same slab rates of taxation. Therefore, now certain artificial juridical persons, such as Association of Persons (AOP) (other than a co-operative organisation), or Body of Individuals (BOI), will also be allowed to choose whether to be taxed under the new or the old regime. It’s noteworthy to notice that you will now have to deliberately choose to be taxed under the previous tax regime; the new tax regime will now be the default option.
Heightened requirements for rebates under Section 87A
The finance minister has recommended that if a person’s total income for the year does not exceed seven lakh rupees, they will be eligible for a rebate of Rs. 25,000/- under Section 87A. However, the threshold amount for being entitled to receive a rebate under Section 87A is still 5 lakhs for individuals who choose the former tax regime. Since a person without company income can choose either plan each year, he will choose the new tax system only if it lowers his overall tax burden. All self-employed individuals who have already chosen to be taxed under the higher threshold limit would greatly benefit from it.
Higher basic exemption threshold for people choosing the new tax system over the previous tax system
The finance minister has proposed three lakh rupees as the least sum up to which no tax will be payable, as opposed to two lakh fifty thousand rupees for individuals who choose the previous tax regime, in an effort to make the new tax regime more appealing. In practise, this means that for everyone who chooses the new tax system, the baseline exemption level has increased by 50,000 rupees.
Adapted tax slabs for the new tax system
The current new tax system gives five tax brackets, each starting at 2.50 lakhs and increasing by 2.50 lakhs until an income of 15 lakhs. Each of these slabs has a tax rate of 5%, 10%, 15%, 20%, and 25%. 30% of income over 15 lakhs is taxed. Four tax levels have now been proposed by the finance minister for a new tax system. The new tax bracket increases by 3 lakhs every 3 lakhs until it reaches 15 lakhs. There are four different slab rates: 5%, 10%, 15%, and 20%. Under the proposed new tax regime, income beyond 15 lakhs is taxed at a flat rate of 30% as well.
Standard deduction and profession tax allowance for salaried
Currently, under the New Tax Regime, you are not eligible to deduct a standard deduction from your wage or pension income, as you could under the previous Regime. It has been suggested by the finance minister to end this prejudice and make this deduction available under the new tax system as well.