What You Need to Know About Income Tax Amendments applicable from FY 2023-24

Understand the key Income Tax Amendments from FY 2023-24. Learn about changes in tax regimes, exemptions, and impacts on individuals, businesses, and trusts.

Every citizen in this country celebrates the new year at a different time based on their religion, caste, and so on. However, for Finance professionals, April 1 is to be considered as the New Year as it marks the beginning of a new financial year and it is always significant from a personal finance point of view as most of the Budget proposals on income tax take into effect from this day. Additionally, other changes also become applicable from this day which may impact one’s money. It’s important to take a look at these to avoid any problems while dealing with them.

Here are the major changes in income tax which will be effective from 1^st April, 2023 i.e. from FY 2023-24:

A. Changes relating to New Tax Regime:

1. New Tax Regime to be the default regime:

Starting 1^st April 2023, the new income tax regime will become the default tax regime. However, taxpayers will still have the option to go for the old regime, but to do so, you will have to file your ITR on or before the due date.

If you are a salaried taxpayer, TDS will be deducted based on tax rates under the New Tax Regime.

2. Basic exemption limit hiked in New Tax Regime:

3. Reduced Surcharge for HNIs under New Tax Regime:

Under the New Tax Regime, the highest surcharge of 37% will be lowered to 25% for those earning more than Rs. 5 crores. This also brings down the highest effective tax rate from 42.74% to 39%.

4. Standard deduction benefit extended to the New Tax Regime:

The standard deduction of Rs. 50,000 on salary income was earlier not allowed in the New Tax Regime until FY 2022-23 (AY 2023-24). However, from FY 2023-24 (AY 2024-25) this benefit of a standard deduction will now be allowed for salaried employees and pensioners opting under the New Tax Regime as well.

5. Tax rebate limit raised from Rs. 5 lakhs to Rs. 7 lakhs under New Tax Regime:

The government has increased the tax rebate limit u/s 87A from Rs. 5 lakhs to Rs. 7 lakhs under the New Tax Regime. In short, any person whose income under the New Tax Regime is less than or equal to Rs. 7 lakhs, need not invest anything to claim any sort of exemption as the entire income would be tax-free irrespective of the quantum of investment made in such cases.

But before you hop onto the new regime, it’ll be wise to compare the new and old one as per your existing as well as expected income for FY 2023-24.

6. Marginal tax relief introduced for small taxpayers under New Tax Regime:

As mentioned above at point no. 5 that the government has increased the tax rebate limit to Rs. 7 lakhs. Thus, they end up paying zero tax on their taxable income up to Rs. 7 lakh. However, if a taxpayer has an income of just a hundred rupees more (i.e. Rs. 7,00,100) he/she ends up paying tax of Rs. 25,010. In other words, an additional income of just Rs. 100 results in a tax outgo of Rs. 25,010 – before cess. Therefore, while passing the Finance Bill, 2023 in Lok Sabha, the government has offered a marginal tax relief to small taxpayers. Hence, individual taxpayers with income of Rs. 7,27,777 would be benefited by this relief.

There are various pros and cons for switching to New Tax Regime. So, you must carefully choose between the old regime and the new regime.

To know in detail about the pros and Pros and Cons for switching to New Tax Regime go through the below article:

Pros and Cons for switching to new tax regime

B. Changes relating to Salaried Employees:

1. LTA encashment limit raised from Rs. 3 lakhs to Rs. 25 lakhs:

The leave encashment for non-government employees is exempt up to a certain limit. This LTA encashment limit was Rs. 3 lakh for two decades (since 2002). It has now increased to Rs. 25 lakhs w.e.f. FY 2023-24.

2. Reduced TDS on EPF withdrawal:

In case of withdrawals, where EPF account is not seeded with account holders’ PAN card, TDS rate will come down to 20% w.e.f. 1^st April, 2023.

C. Changes relating to Business and Professions:

1. Deduction of expenditures will be allowed on payment basis on purchase from Micro and Small Enterprises:

From FY 2023-24 the buyers can claim deduction of expenditures in income tax only on payments made to a micro and small (not medium) supplier. In short, a company can’t claim the expense under the act until the payment has actually been made to the seller. So, if buyers take an invoice from a micro and small enterprise, they will have to actually make the payment to them in order to take a deduction in the income tax for that particular expenditure. Otherwise, it will be added to their income.

Please read the below article to understand how this would actually work in reality:

Practical Implication of amendment relating to MSME – Section 43B deduction only on payment basis 

2. Limit hiked under the presumptive scheme:

The government has hiked the threshold limits for presumptive schemes under section 44AD and section 44ADA. The turnover u/s 44AD has been increased from Rs. 2 crores to Rs. 3 crores and for professionals’ u/s 44ADA from Rs. 50 lakhs to Rs. 75 lakhs subject to 5% cash receipts.

3. Ease in claiming deduction on amortization of preliminary expenses

Section 35D of the Income Tax Act provides for amortization of certain preliminary expenses which are incurred prior to the commencement of business or after commencement, in connection with extension of undertaking or setting up of a new unit. This includes expenditure in connection with preparation of feasibility report, project report etc. It should either be carried out by the assessee himself or by a concern which is approved by the Board.

In order to ease the process of claiming amortization of these preliminary expenses now, the assessee himself required to furnish a statement containing the particulars of this expenditure within the prescribed period to the prescribed income-tax authority in the prescribed form and manner.

D. Changes relating to Capital Gains:

1. No more LTCG Tax benefit on Debt Mutual Funds:

In the recently passed Finance Bill 2023, LTCG tax benefits on debt mutual funds have been taken away. So, w.e.f. 1^st April, 2023, any investments in debt mutual funds (subject to the equity exposure upto 35%) will be taxed as short-term capital gains.

Kindly read the below article to know in detail about this amendment.

Long Term Tax benefits removed from Debt Mutual Funds & its consequences

2. Conversion of Physical Gold to Electronic Gold Receipt to become Tax Free:

In a move that seems to be aimed at encouraging the purchase of electronic gold, the government has removed capital gains tax if physical gold is converted to an Electronic Gold Receipt (EGR) and vice versa. i.e. w.e.f. 1^st April, 2023, there will be no capital gains tax implication if physical gold is converted to Electronic Gold Receipt (EGR) or the vice-versa.

Kindly read the below article to know in detail about this amendment.

Major amendments in Budget 2023 relating to Capital Gains

3. No preferential taxation for market-linked debentures:

From 1^st April, 2023, taxation of income from listed market-linked debentures (MLDs) will no longer be favorable. MLDs will now be taxed as debt instruments, putting an end to the more benign equity-like taxation currently.

At present, capital gains from such listed debentures are taxed at 10% after a holding period of more than a year and from 1^st April, 2023 it will now be taxed as short-term capital gains at the slab rate similar to comparable debt investments.

Kindly read the below article to know in detail about this amendment.

Major amendments in Budget 2023 relating to Capital Gains

4. New cap on reinvestment of capital gains from the sale of housing property:

The government has imposed a cap of Rs. 10 crores on the reinvestment of capital gains from sale of housing property under the provision of section 54 & 54F. Any gains above that will be taxed at 20% (with indexation benefit).

Kindly read the below article to know in detail about this amendment.

Major amendments in Budget 2023 relating to Capital Gains

5. Prevention of double deduction claimed on interest on borrowed capital for acquiring, renewing or reconstructing a property:

It has been observed by the government that some assessees have been claiming double deduction of interest paid on borrowed capital for acquiring, renewing or reconstructing a property. Firstly, it is claimed in the form of deduction from income from house property under section 24, and in some cases the deduction is also being claimed under other provisions of Chapter VIA of the Act. Secondly while computing capital gains on transfer of such property this same interest also forms a part of cost of acquisition or cost of improvement under section 48 of the Act.

In order to prevent this double deduction, the cost of acquisition or the cost of improvement shall not include the amount of interest claimed under section 24 or Chapter VIA.

E. Changes relating to Other Sources:

1. Maturity is no more exempt for Life insurance proceeds (except ULIPs) taxable for premium over Rs. 5 lakhs:

With effect from 1^st April, 2023, if aggregate of premium for life insurance policies issued on or after 1^st April, 2023 is above Rs. 5 Lakhs, proceeds from such policies over the annual premium of Rs. 5 lakhs would be taxable (i.e Upto Rs. 5 lakhs shall be exempt) at the applicable rates.

2. Tax on Online Gaming:

A new section, 115BBJ, was introduced to tax the winnings from online games. All forms of winnings, such as cash, kind, vouchers, or any other benefit, from online gaming, will attract tax at a flat 30%, which will be deducted for every rupee earned, net of entry fees (if any).

3. Tax on distribution by business trusts to its unit holders:

In the Finance Bill, 2023, last month, the government had proposed that distributions by REITs and InvITs which was classified as repayment of debt will be taxed in the hands of unitholders under other sources w.e.f. 01/04/2023.

The proposal saw considerable pushback from industry and therefore, the government has decided to soften the tax impact on unit holders of REITs and InvITs, as envisaged in the Finance Bill, 2023, last month.

It has been proposed that only a portion of distribution as repayment of debt i.e. a ‘specified sum’ will be taxable. The specified sum is arrived at after taking out the cost of acquisition from the distributed amount.

For e.g. If a REIT or InvIT had an issue price of Rs. 100 and in 2024, the amount distributed as repayment of debt was Rs. 30, there will be no tax on this in the year of distribution since it is lower than the issue price. If in future the trust’s cumulative distribution becomes Rs. 120, then Rs. 20 is taxed in the hands of the unitholder in the year of receipt. If in the subsequent year the amount increases to Rs. 150, then tax will be on Rs. 30, since tax has already been paid on Rs. 20 in the previous year.

To understand the concept of Business Trusts in detail about how it works and its taxability, please read the below article:

Taxability of Business Trusts (REIT / InvIT) in India (Amended as per Budget 2023)

4. Gifts received by Resident but not-ordinarily residents (RNOR) will also be taxed:

Finance Act 2019, inserted clause (viii) Section 9(1) of the Act to provide that any sum of money in excess of Rs 50,000/- received by a non-resident without consideration from a person resident in India on or after 05/07/2019 shall be deemed to accrue or arise in India and therefore taxable in India. It has come to the notice that certain persons being not ordinarily resident are receiving the gifts from Resident Indian and not paying tax.

In view of the above, gifts received by Resident but not-ordinarily residents (RNOR) will be taxed in India. They have extended this deeming provision to Not ordinary residents.

F. Changes relating to Trusts:

1. Depositing back of corpus and repayment of loans and borrowings:

Under the existing provisions, the assessee was allowed to claim the exemption of the money applied for charitable purposes drawn out of the corpus funds or loans only after the amount applied was brought back in the subsequent previous years. Earlier there was no time limit to restore the funds applied which were claimable as application of Income in subsequent years. Now, in order to claim the benefit of application in subsequent years the investment w.r.t corpus funds is required to be restored or borrowings are required to be repaid within 5 years from the end of the previous year in which such application was originally made.

Further, the amount drawn can be treated as application of Income only if no violations are made under sections 40(a)(ia) or 40A(3) etc. Such benefit of application of money cannot be availed if such application was made prior to 1st April, 2021.

2. Restriction on donation given to other Trusts:

Normally, as per the current income tax rules, trusts have to spend minimum 85%of their income either by themselves or by making donations to other Trusts having similar objects. They can either spend balance 15% or accumulate as per their wish and strengthen their corpus.

To prevent the misuse of accumulation at multiple Trust, the government has proposed that if the donation is paid to other registered trusts / institutions, only 85% of such donations shall be treated as application for charitable / religious activities w.e.f. FY 2023-24. 

3. Preponement of due date of Filing Form 9A and Form 10:

In order to align the time limits it is proposed that such Forms should be filed at least two months prior to the due date for furnishing return of income under section 139(1) of the Act.

Revised due dates for “FY 2022-23” relating to charitable / religious trusts:

• Trust Audit Report i.e. Form 10B: 30^th September;
• Income Tax Return: 31^st October;
• Form 9A / 10: 31^st August; 

4. Exemption u/s 11 is to be allowed only if the return is filed within due date specified u/s 139(1) and 139(4):

The exemption u/s 11, 12 and 10(23C) will be available only if the return of income is furnished within the time limit specified under section 139(1) or 139(4) of the Act with effect from 1^st April, 2023, thereby it is clarified that the exemption is not allowed if the updated return u/s 139(8A) is filed.

5. Non filing of application for registration / re-registration will be liable for Exit Tax:

It is proposed to amend the Section 115TD of the Act to provide that if any trust or institution fails to make an application for re-registration within the period specified, it shall be deemed to have been converted into any form not eligible for registration in the previous year in which such period expires.

The exit tax shall be paid on accreted income within fourteen days from the end of the previous year. The proposed amendment plugs the loophole where such assessee was able to utilise the tax exempted corpus for non-charitable purposes without having any tax implications.

G. Other Important Changes:

1. Maximum deposit limit under SCSS increased to Rs. 30 lakhs:

In a boost for senior citizens, the maximum investment limit for the deposit in Senior Citizen Savings Scheme (SCSS) has been doubled from Rs 15 lakh to Rs 30 lakh, w.e.f. 1^st April, 2023. Also, the maximum deposit for the monthly income scheme has been increased from Rs. 4.5 lakhs to Rs. 9 lakhs for single accounts. For joint accounts, the limit has been raised from Rs. 7.5 lakhs to Rs 15 lakhs.

2. Extension of date of incorporation for eligible start up for exemption:

The date of incorporation for eligible startups for claiming exemption u/s 80 IAC is extended to 01/04/2024 to promote the development of startups in India and to provide them with a competitive platform.

3. New concessional tax rate to new manufacturing co-operative society:

The government has proposed a concessional rate of 15% to new manufacturing co-operative society from FY 2023-24.

Also, there are various procedural amendments made by the government effective from FY 2023-24 which I have not covered here.