Just before the Finance Minister presented Budget 2023 in the Lok Sabha, my father, echoing the sentiments of many, said: “Being a middle class salaried person, why would anyone opt for the simplified tax regime u/s 115BAC?”
This question may have to be re-looked especially after the Budget announcement by the Finance Minister. In her budget speech, she remarked – “Our government constantly strives to provide the necessary ecosystem for the middle classes – a vast and wide section which is populated across various middle-income brackets – to make use of the opportunities they so desire.”
With the objective as cited, the government has done a major juggle to the simplified tax regime in order to encourage more individual taxpayers to switch from the old regime to the simplified one. This is specially to reduce the complexities in filing of returns and assessments arising out of the plethora of deduction claims of the taxpayer that are applicable in the old regime. With such underlying motives, some significant amendments in the simplified tax regime u/s 115BAC have been proposed in the Finance Bill 2023, with effect from financial year 2023-24.
- Increase in Basic Exemption Limit from Rs. 2,50,000 to Rs. 3,00,000;
- New proposed slab rates in the simplified tax regime u/s 115BAC;
- Increase in Limit of Rebate u/s 87A from Rs. 5,00,000 to Rs. 7,00,000;
- Allowability of Standard Deduction u/s 16(ia) of Rs. 50,000 and Family Pension Deduction u/s 57(iia) in Simplified Tax Regime
Further, another significant amendment which has been proposed is that the simplified regime has been made the default tax regime. Thus, taxpayers wanting to continue with the old tax regime will now have to opt for the same while filing the income-tax return.
An individual having income (other than income from business or profession) can opt for either of the regimes on year-on-year basis. However, an individual having income from business or profession has the option to choose between the tax regimes only once. Also, the option to switch back to old tax regime is available only once in a lifetime.
Benefit of amendments made under Section 115BAC
The existing slab rates vis-à-vis the proposed revised slab rates u/s 115BAC are as under:
| Existing slab rates (Section 115BAC) | Proposed Revised slab rates (Section 115BAC) | ||
| Total income | Rate of Tax | Total Income | Rate of Tax |
| Up to Rs. 2,50,000 | Nil | Up to Rs. 3,00,000 | Nil |
| From Rs. 2,50,001 to Rs. 5,00,000 | 5% | From Rs. 3,00,001 to Rs. 6,00,000 | 5% |
| From Rs. 5,00,001 to Rs. 7,50,000 | 10% | From Rs. 6,00,001 to Rs. 9,00,000 | 10% |
| From Rs. 7,50,001 to Rs. 10,00,000 | 15% | From Rs. 9,00,001 to Rs. 12,00,000 | 15% |
| From Rs. 10,00,001 to Rs. 12,50,000 | 20% | From Rs. 12,00,001 to Rs. 15,00,000 | 20% |
| From Rs. 12,50,001 to Rs. 15,00,000 | 25% | Above Rs. 15,00,000 | 30% |
| Above Rs. 15,00,000 | 30% | ||
The amendment aims to reduce the number of slabs in the simplified tax regime. An illustration of the tax payable at different incomes levels under the simplified regime is provided below:
Illustration 1 –
| Total Taxable Income | Tax payable under the existing provisions | Tax payable under the proposed amended provisions (after availing standard deduction of Rs. 50,000) |
| Rs. 7,00,000 | Rs. 32,500 | 0 |
| Rs. 9,00,000 | Rs. 60,000 | Rs. 40,000 |
| Rs. 15,00,000 | Rs. 1,87,500 | Rs. 1,40,000 |
With the proposed amendments under the simplified tax regime, it may be noted that an individual with Rs. 9,00,000 taxable income, will pay tax of Rs. 40,000, which is approximately 4.45% of the salary, a reduction of Rs. 20,000 from the present tax payable of Rs. 60,000.
Old Regime vs. Simplified Regime – which is beneficial for me?
It is pertinent to note that for individuals and HUFs having a gross annual total income of below Rs.7,00,000 in FY 2023-24 and onwards, the choice of the exercise of default simplified regime u/s 115BAC and claiming the rebate u/s 87A is crystal clear and beyond any doubt, as the old regime only provides for the rebate exemption limit of the total income amounting to Rs. 5,00,000.
On the other hand, for individuals and HUFs having a gross annual total income in excess of Rs. 7,00,000
in FY 2023-24 and onwards, a well-informed and considered choice has to be made.
The slabs and corresponding tax rates under the old regime are tabulated below:
| Total income (in Rs.) | Tax Rate |
| Up to Rs. 2,50,000 | Nil |
| From Rs. 2,50,001 to Rs. 5,00,000* | 5% |
| From Rs. 5,00,001 to Rs. 10,00,000 | 20% |
| Above Rs. 10,00,000 | 30% |
* Rebate under section 87A for income upto Rs.5,00,000
Also, under the old regime, the assessee can avail deductions, exemptions, and allowances as may be applicable. The same cannot be claimed under the simplified tax regime.
Deductions and exemptions under old tax regime, but that which cannot be availed under the simplified tax regime:
| Deductions | Exemptions |
| Public Provident Fund | Saving Account Interest |
| Equity Linked Savings Scheme (ELSS) | House Rent Allowance |
| Employee Provident Fund | Leave Travel Allowance |
| Life Insurance Premium | Mobile and Internet Reimbursement |
| Principal and Interest component of House Loan | Food Coupons or Vouchers |
| Children Tuition Fees | Company Leased Car |
| Health Insurance Premiums | Investment in NPS |
| Uniform Allowance | Tuition fee for Children |
| Leave Encashment |
The old tax regime had led to instilling the culture to save in individuals over time by encouraging investments in specific tax-saving instruments so as to avail tax benefits. However, the simplified tax regime looks at putting money in the hands of taxpayers and encourage consumption. With no exemptions/deductions, one’s taxable income could be greater than it was under the old tax regime.
Illustration 2 – Let us understand the above with an example:
An individual has gross total annual income of Rs. 40,00,000.
Deduction claim u/s 80C – contribution to PPF – Rs. 1,50,000, Deduction claim u/s 80D Health insurance – self and spouse and parents (if senior citizen) – Rs. 25,000 + Rs. 50,000, House Rent Allowance – Rs.1,50,000, Leave Travel Allowance – Rs. 25,000, New Pension Scheme 80CCD(1B) – 30,000
| Particulars | Old Tax Regime (Rs.) | Simplified Tax Regime (Rs.) |
| Annual Income | 40,00,000 | 40,00,000 |
| Less: Standard Deduction | 50,000 | 50,000 |
| Less: Section 80C (EPF +LIC+ Tuition Fees, etc) | 150,000 | Nil |
| Less: House Rent Allowance | 1,50,000 | Nil |
| Less: Health Insurance- self and spouse- parents (if senior citizen) | 75,000 | Nil |
| Less: Leave Travel Allowance | 25,000 | Nil |
| Less: New Pension Scheme 80CCD (1B) | 30,000 | Nil |
| Total (Deduction & Exemption) | 4,80,000 | 50,000 |
–
|
Net Taxable Income (Annual Income – Total deductions & exemptions) |
35,20,000 | 39,50,000 |
| Tax Payable | 8,68,500 | 8,85,000 |
With reference to the above, one may appreciate that in terms of tax slab rates, the simplified regime u/s 115BAC is the clear winner. However, the old tax regime turns out to be better if the taxpayer has deductions available other than the standard deduction. If the taxpayer does not wish to block his hard-earned income for non-commensurate tax benefits, then the simplified tax regime shall be more beneficial.
To simplify for the understanding, a BREAK-EVEN POINT ANALYSIS would be helpful for the taxpayer to make an informative choice and decision of opting for the most optimum tax regime.
Break- Even Point Analysis between Simplified & Old Tax Regime
| Income in Rs. | Less: Standard Deduction in INR | Net Income in INR | Tax Liability as per Simplified Regime |
Additional Deductions (over & above standard deduction) required in Old Regime for Break Even | When will Simplified Tax Regime be More Beneficial? |
| 7,00,000 | 50,000 | 6,50,000 | 0 | 1,50,000 | At an income level of Rs. 7,00,000 and less, an individual will benefit only in simplified regime |
| 10,00,000 | 50,000 | 9,50,000 | 52,500 | 2,50,000 | If the available deductions (other than standard deduction) are less than Rs. 2,50,000 |
| 15,50,000 | 50,000 | 15,00,000 | 1,50,000 | 3,75,000 | If the available deductions (other than standard deduction) are less than Rs. 3,75,000 |
In view of the above break-even analysis, in case if we consider the total deduction amount of Rs. 3,00,000 for calculating tax under old tax regime in illustration 2, the tax payable amount shall be Rs. 9,07,500 viz. greater than tax payable amount under simplified tax regime.
Since the eligible deductions, sources and quantum of income differs for every individual, there is no question of a standard rule applicable to all. The taxpayer shall need to evaluate and compare the tax liability under both tax regimes before making a realistic decision and planning long-term financial goals in a more efficient manner.
****
(The Article is Co-authored by Zainab Bookwala (Senior Manager) and Prachi Shah (Deputy Manager) from Deloitte Haskins & Sells LLP)
