The Budget 2023 has been tabled by the government. While I said earlier that what happens in the annual central budget doesn’t impact your finances as much as the impact of your decisions (see why here), there are still a few announcements that common people need to be aware of and take into consideration going forward.
So, without any delay, see what these are and how they impact you:
- The new tax regime is here to stay. Not only has it been made attractive with lower effective tax rates (and a reduction in the number of slabs), but it has also been made the default option. The writing is clear on the wall. The government wants to do away with 2 systems of taxation. In the near future, India might move entirely to a zero-exemption-lower-tax system. Unlike the old tax regime, the new tax system does not allow the use of any of the deductions that you might be used to. To compensate, it offers lower tax rates for different slabs, especially for the common people who don’t qualify for the highest income slab.
- If you earn less than ₹7 lakh per year, then your taxes will be nil if you opt for the new tax regime. For those earning more, whether the new taxation works better or the older one, depends on the individual’s income and deductions availed till now. There can be multiple permutations and combinations and there is no one right answer that fits all. MintGenie has done an exhaustive scenario analysis to help you pick one of the two. You can deep dive into the full analysis available here.
- There is some good news for salaried employees in the private sector who at the time of retirement, had to pay heavy taxes on leave encashments. The Budget has increased the tax exemption on leave encashment for private-sector salaried employees from ₹3 lakh to ₹25 lakh. The leave encashment received by government employees is anyways fully exempt. The only issue is that most private companies put a limit on the number of leaves you can accumulate. The encashment money is taxable and will be added to the taxable salary and taxed accordingly. So, this increase in limit will help those only whose employers allowed for enough accumulation of earned leaves.
- The Budget has plugged the loophole that allowed traditional insurance policies (non-ULIPs) to have tax-free maturity. Going forward the maturity proceeds of non-ULIP life insurance policies will be tax-free only if the annual premium is less than ₹5 lakh. So, if you were planning to purchase traditional LIC plans (like endowment and money back policies) of high premiums for the reason of tax-free maturity payout, then you need to rethink your decision. ULIPs anyways aren’t tax-free if the annual premium is more than ₹2.5 lakh. By the way, existing policies are not impacted by this change. It is only for new policies purchased from April 2023.
- If you are an investor in equity mutual funds or direct stocks, then there is no update for you. The government has decided to make no changes to the tax rates for LTCG and STCG. Neither has it made any changes to the holding period definition for long and short terms which was widely expected this time. But the taxation of Market linked debentures (MLDs), which most people may not know or invest in, has been changed. The short-term and long-term gains from MLDs will be taxed at slab rates.
- In what has brought a smile to many senior citizens’ faces, the investment limit for Senior Citizen’s Savings Scheme (SCSS) has been hiked to ₹30 lakh from the ₹15 lakh currently. With current rates at 8%, SCSS has long been a popular choice for senior citizens. For a married couple of senior citizens, this creates the option of parking a total of ₹60 lakh at 8% to generate a pre-tax income of ₹4.8 lakh a year.
- Surprisingly, there has been no announcement about the extension of the PMVVY scheme (or Pradhan Mantri Vaya Vandana Yojana), which is scheduled to expire on 31st March 2023. And given that the SCSS limit has been increased, it seems that the government may have decided to phase out PMVVY and just keep SCSS as the only senior-citizen-oriented scheme.
- The Post Office Monthly Income Scheme limit has also been hiked to ₹9 lakh from earlier ₹4.5 lakh for individuals and to ₹15 lakh for joint accounts. This is also a good move to ensure adequate sources of interest income for many in the current high inflation environment.
- A new women-specific small savings scheme Mahila Samman Saving Certificate has been announced. This is a one-time scheme available only till March 2025. The tenure of this scheme is 2 years and offers a fixed 7.5% per year interest. Given the small amount that the scheme allows, it has a limited use case for many working women but nevertheless, is something for those who had limited savings and needed a reasonable interest rate to park the funds.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.