The Finance Bill, 2023 was tabled by Hon’ble Union Finance Minister, Smt. Nirmala Sitharaman in the Parliament on 1st February, 2023. The striking feature of this budget was that the government attempted to make the new tax regime attractive for the assessees and thus attempting to pursue taxpayers to switch to the new tax regime from the old tax regime, but will this be really beneficial for all the assessees and/or the government, my article elaborates on the same.
The Income Tax Act, 1961 provides for two options for the purpose of computation of tax liability, one is the old tax regime which has been followed since very long and the other is the new tax regime under Section 115BAC. The main difference between the two tax regime is that under old tax regime, the tax rates are comparative higher but it also has the availability of deductions from income. While on the other hand, the new tax regime has a lower rate of taxation but has no option available for deductions. Most of the deductions under Chapter VIA of the Act, like 80C, 80D etc. are not allowed. Majority of the taxpayers today follow the old tax regime and not the new tax regime, even though the rates are higher as the assessees can claim deductions in the old regime.
THE INCREASE OF REBATE UNDER SECTION 87A
One of the major changes which this Bill brought was that of increasing the income limit applicable for Rebate of Income under Section 87A of the Income Tax Act, 1961. Earlier the rebate on amount of tax payable was available for resident individuals having an income up to Rs. 5 lakhs in both the new and old tax regimes. However, from 1st April 2023, the rebate which shall be available to individuals shall be up to Rs. 7 lakhs and this is only available for those assessee who follow the new tax regime and not the old tax regime. Practically speaking, the assessees who follow new tax regime is far less than those who still follow the old tax regime. Therefore, the assessees who is in the old tax regime cannot avail the benefit of the rebate. Subsequently meaning that the rebate is not available to majority of the tax-payers.
Although, deductions under Chapter VI-A is not available in the new tax regime, the Union Government vide the Finance Bill, 2023 has allowed standard deduction of Rs. 52,500 in case of salaried individuals, having an income of Rs. 15.5 lakhs or more.
AN ATTEMPT TO MAKE NEW TAX REGIME MORE LUCRATIVE
The Government has also made the new tax regime as default which means that now the assessees who wish to compute their income under the old tax regime will have to exercise the option while filing their annual income tax return. Earlier, the assessees would have to exercise the option to choose filing under Section 115BAC. The assessees who are willing exercise this option can opt out of the new tax regime only once and if they wish to opt in to the new tax regime again, they shall not be allowed to opt out from the same. Further, in the new tax regime, the slabs of income have been reduced from 7 to 5
By now, it is quite clear that government wants more persons to come under the ambit of new tax regime. For example, with the increase in income in which Rebate will be applicable, allowing standard deduction in certain cases and also making the new tax regime as the default regime. But will this be enough to ensure that a person moves on from the exemption based regime to a regime with absolutely no or some exemptions?
An individual who computes his tax liability under the old tax regime can easily avail a deduction of Rs. 2 lakhs. For instance, the assessee can make capital contribution under Section 80C to its maximum limit and a deduction of 1.5 lakhs can be availed, further deductions like under Section 80TTA, 80D can be availed by the assessee. For salaried persons, even more deductions can be availed, for instance, standard deduction is available which is Rs. 50,000 and further any professional tax paid will also be added to this standard deduction. Further, House Rent Allowance can also be availed in the old tax regime and the same will not be allowed in the new tax regime.
Therefore, for a person to choose between the new or old tax regime, it will be dependent on the expenditures which one makes and rates have a very little role to play.
IS INDIA REALLY READY FOR NEW TAX REGIME?
As per the report of National Family Health Survey-5 (NFHS-5), a little over 41 percent of Indians have at least one individual covered by a health insurance plan or health scheme, which means that there is a large part of population which still has no medical cover for any of the family members and deductions like one in 80D, encourages such people to get a personal medical insurance, which adds to social security and also helps in reducing the net tax liability on their income.
Similarly, capital contribution not only helps the government in injecting the surplus money in the economy, but it also helps the taxpayers to invest their surplus, instead of merely spending it and also helping them reduce a maximum of 1.5 Lakhs from their taxable income under Section 80C of the Income Tax Act, 1961.
While this Budget has been hailed as pro-Middle class, I will humbly disagree to the same since, all the changes has been done in the new tax regime and the fact that new tax regime is not much used by majority of the taxpayers. The Government is trying to induce a behavioral shift of the taxpayers who currently pay their tax under the old tax regime to new tax regime, which is a mixed-bag. It is true that both will benefit the taxpayers based on their pattern of expenditure of their income but one brilliant feature of the old tax regime is that it also results in the social security of the assessees and makes their financial habit a bit more inclined towards savings and investing.