The Budget 2023 announced some benefits for the new tax regime. It was done to encourage more individuals to shift from the old tax regime to the new tax regime. Let us look at five of these changes.
Increase in basic exemption limit
Budget 2023 has raised the basic exemption limit from Rs. 2,50,000 to Rs. 3,00,000 under the new tax regime.
Reduction in the number of tax slabs
The new tax regime had 6 tax slabs earlier. In Budget 2023, the number of slabs has been reduced to 5 as follows:
| Income Range (Rs.) | Tax Rate |
| Up to 3,00,000 | Nil |
| 3,00,001 to 6,00,000 | 5% |
| 6,00,001 to 9,00,000 | 10% |
| 9,00,001 to 12,00,000 | 15% |
| 12,00,001 to 15,00,000 | 20% |
| Above 15,00,000 | 30% |
Increase in rebate limit
Under Section 87A, an individual with an income of up to Rs. 7 lakhs will be able to avail of the rebate in the new tax regime. In other words, they will not need to pay any income tax. It will result in net tax savings of up to Rs. 25,000. Earlier, the maximum rebate that could be availed was up to Rs. 12,500 on an income of Rs. 5,00,000.
Standard deduction
The standard deduction benefit under Section 16(ia) for salaried individuals has been extended to the new tax regime. Under this, an individual will be able to avail of a deduction of Rs. 50,000 from their taxable income.
Reduction in the surcharge for high-income earners
Earlier, individuals with an annual income of above Rs. 5 crores had to pay a surcharge of 37%. Their overall tax rate was 42.74%. The Finance Minister has proposed to bring down the surcharge from 37% to 25% under the new tax regime. It will bring down the 42.74% peak tax rate to 39%.
The new tax regime will be the default regime
The Finance Minister also announced that the new tax regime will be the default regime at the time of filing Income Tax Returns (ITR). If the individual wishes to file returns under the old tax regime, they will have to opt for it.
Should you opt for the new tax regime?
Budget 2023 has provided most of the benefits for the new tax regime. There is a lot of discussion among individuals using the old tax regime on whether they should shift to the new tax regime. Well, there is no straightforward answer to this.
Under the new tax regime, an individual will be able to avail rebate under Section 87A for an annual income of up to Rs. 7 lakhs. It means they will not be required to pay any income tax for an income up to Rs. 7 lakhs. Under the old tax regime, the rebate is available for an annual income of up to Rs. 5 lakhs.
So, if your annual income is more than Rs. 5 lakhs, but less than Rs. 7 lakhs, and you are not availing of any exemptions and deductions, you may opt for the new tax regime.
If your income is higher than Rs. 7 lakhs, then the choice of the tax regime will depend on the amount of deductions and exemptions that you are going to avail of. The higher the annual income above Rs. 7 lakhs, the higher the number of deductions and exemptions you will need to justify continuation with the old tax regime.
In the case of most people, the total deductions and exemptions reach a maximum level of Rs. 2.5 lakhs. These may include a combination of HRA exemption and deductions under Section 80C, 80D, 80TTA, 24, etc. With a total of around Rs. 2.5 lakhs in deductions and exemptions, the old tax regime will be beneficial up to a total income of around Rs. 8.5 lakhs or so.
Beyond this income range, it will make sense to switch to the new income regime unless you are able to increase the amount of deductions and exemptions which are not possible for many people. The best way to find which tax regime you should use is by calculating your tax payable under both regimes and accordingly taking a decision.
The Government also wants individuals to adopt the new tax regime which is simple and straightforward without most of the deductions and exemptions. Budget 2023 has been designed keeping in mind this purpose.
However, in the new tax regime, there is no incentive for individuals to either buy protection (life and health insurance) or invest for wealth creation as it doesn’t offer deductions. That is a major flipside of the new tax regime.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn
