Union Budget 2023: Will moving to the new tax regime help you? Here’s the math

While no changes have been made in the old tax regime, the government has decided to increase the scope of rebate to those with a taxable income of Rs 7 lakh per year from the earlier limit of Rs 5 lakh in the new system. Put simply, this means that those with an annual income of up to Rs 7 lakh will not be required to pay tax under the new system. The income ceiling for rebate in the old regime continues to be Rs 5 lakh.

On the other end of the spectrum are the super-rich (those with annual income of over Rs 5 crore), who will benefit from a massive cut in income tax surcharge to 25 per cent from 37 per cent under the new regime. This would reduce the effective rate of income tax for this group to 39 per cent from 42.7 per cent.

The tax burden under the new scheme has also been rationalised by revising its slabs and introducing the benefit of standard deduction.

Considering various scenarios across income groups, it appears that the spruced up tax regime will be more lucrative and nudge a large number of taxpayers to switch to it. The analysis showed that unless an individual claims hefty tax exemptions, he/ she stands to benefit by migrating to the new system. In fact, quoting a finance ministry official, a PTI report said only those claiming deductions of over Rs 3.75 lakh would benefit from sticking to the old regime.

The various tax slabs.

A comparison of tax computations for an individual earning Rs 15 lakh per annum under both tax regimes suggests that his annual tax liability will be Rs 1,45,600 under the new regime, against Rs 1,24,800 in the old regime. However, it is worth noting that to save the additional Rs 19,800 in tax, the individual will have to claim deductions worth Rs 1.50 lakh under Section 80C, Rs 25,000 on health insurance premia for self and family, Rs 50,000 as health insurance premium for senior citizen parents, and Rs 2,00,000 towards home loan interest.

The analysis shows that for anyone with an annual income of more than Rs 15 lakh, the tax liability under the old regime would be lower by around Rs 30,000 a year, or Rs 2,500 a month, and that too if most deductions are claimed up to their maximum permissible limits. According to the government’s assessment, the pool of taxpayers claiming heavy deductions is extremely small.

As for those falling under lower income slabs, the tax liability differential would be higher in favour of the old tax regime if he/ she, somehow, manages to claim all of the four deductions mentioned above. If an individual earning Rs 10 lakh manages to claim all these deductions, his/ her tax liability under the old regime would be Rs 18,200 instead of Rs 54,600 in the new regime. However, it is extremely unlikely that an individual at that income level will be able to claim such hefty deductions.

Union Budget 2023: All you need to know

• ↗️ Finance Minister Nirmala Sitharaman’s Union Budget 2023 has some big takeaways
• ↗️ First, what everyone has been looking forward to: changes in the new income tax regime. She has made the new tax regime more attractive. There are changes in the rebate limit and in tax slabs. What does this mean for the taxpayer?
• ↗️ FM Sitharaman proposed a 33% increase in capital investment outlay, raising it to Rs 10 lakh crore. This is the biggest in the past decade. What does it mean?
• ↗️ Some articles get cheaper and others get costlier due to changes in customs duty. Here is a list
• ↗️ The capital outlay for the railways has been increased to the highest ever – Rs 2.40 lakh crore. The government is trying to create more jobs
• ↗️ FM Sitharaman said the fiscal deficit will fall to 5.9% of the GDP. What does it mean for the stakeholders?
• ↗️ The FM called it the ‘first Budget of Amrit Kaal’. PM Narendra Modi said it will build a strong foundation for a developed India. What did opposition leaders say?