Tapati Ghose, Partner, Deloitte India, says till last year, just about 5% to 10% of employees across companies had opted for the new tax regime which is why the government had to make the changes to make it more attractive. We will have to wait and see for FY23 how many would opt for it and the results really would be known when they start filing the tax returns for FY23 which are due July 31st because that is when the individuals will have to make that choice for filing the tax return.
Let’s talk about the new tax regime breakup, since that is a default tax regime if you do not mention that you want to stick to the old one. Let us discuss the tax slabs under the tax regime and the kind of benefits which were introduced in the Budget this time.
A good place to start is to understand what were the changes. We have heard that the new tax regime has been made much more attractive in this Finance Act. First of all, the tax structure has been looked at again. The slabs have been rationalised. The number of slabs have come down to five. And again, the basic exemption limit has been increased to Rs 3 lakh and then with every increase of three lakhs, the tax rates go up from 5, 10, 15, 20, and 30%.
So compared to the past, across all levels, the tax liability will come down just because of the way the tax structure has been changed.
Over and above that, the rebate under 87A has been increased to Rs 7 lakh. It was Rs 5 lakh before. Currently, individuals with income up to Rs 5 lakh were not required to pay any tax since the tax on such income is provided as rebate under 87A. And with this Budget, from 1st of April 2023, this rebate has been increased to Rs 7 lakh, which means that anyone getting income up to Rs 7 lakh under the new tax regime will not need to pay any tax.
Standard deduction has been introduced under the new tax regime as well which is a positive move. Earlier, it used to be only in the regular regime or the old regime. Then, for the very high-income group, that is for those above five crores, there is a reduction in surcharge from 37% to 25% making the effective tax rate come down from 42.74% to 39% which makes it absolutely attractive in those levels of income.
But overall, it is not that all of these changes result in a positive outcome for all. It would need to be looked at on a case to case basis because under the old regime, there are a significant number of exemptions and benefits that are there which are lost under the new tax regime.
Exactly. Could you help us with onboarding taxpayers which are there on the new tax regime as per the new tax regime? Do we have such a number and is it more, has it increased?
Till last year, of course, the numbers were not so good which is why when we spoke to companies across, just about 5% to 10% had opted for the new tax regime which is why the government has had to make these changes to make it more attractive. But we will have to wait and see for FY23 how many would opt for it and the results really would be known when they start filing the tax returns for FY23 which are due July 31st because that is when the individuals will have to make that choice for filing the tax return.
What kind of tax regime should people be sticking to? Please explain this by giving us an example of someone who maybe earning between Rs 7 lakh and Rs 10 lakh annually and Rs 10-15 lakh and then more than Rs 15 lakh. For someone who is taking all the benefits as per the old tax regime, should there be any reason to opt for the new tax regime?
Let me take two examples. For those below, say Rs 7 lakh, really not much of a choice to be made. There is no tax for those under the new tax regime, so we will keep those aside.
Let us take an example of somebody who has an income from a salary of about Rs 15 lakh. Under both the regimes, you are entitled to a standard deduction of Rs 50,000. You are allowed a deduction of professional tax of Rs 2,400 under the old tax regime. Say the person has a housing loan interest and a deduction of 2 lakh is allowed under the old tax regime. Say the person has interest from savings and interest from FDs. That income is taxable, of course, under both the regimes.
The person may be staying in a rented accommodation and is entitled to pay a house rent allowance deduction under the old tax regime. Say that is 1 lakh. The person is entitled to a leave travel concession of Rs 50,000 under the old tax regime. Taking an example, of course, these numbers would differ from person to person; LTC of Rs 50,000; 80c for say life insurance premium payments, PF, PPF, housing loan principal payments, say 150,000, which is the limit that is there.
One could be contributing to NPS, an additional contribution for NPS, say of Rs 50,000. Employer contribution to NPS could be Rs 150,000. One could be having a mediclaim premium of Rs 25,000 because you are earning interest from FDs, you will be entitled to a 80TTA of Rs 10,000. Putting all of these together, most, except for the standard deduction, none of the other deductions and reliefs are available under the new tax regime.
The outcome as such for a person at Rs 15 lakh, you would have a tax liability of about Rs 70,000 under the old tax regime and about R 1,30,000 under the new tax regime. Obviously, if the amount of deductions and exemptions that are available are significant, the old tax regime wins hands down. In this particular case, there would be a savings of about Rs 60,000 if they go by the old tax regime.
That is just one of the examples. We could take a similar case as far as somebody who earns Rs 10 lakh with a similar kind of deductions and exemptions that are allowed under the old tax regime but not allowed under the new tax regime. They would not need to pay any tax under the old but would have to pay about Rs 48,000 under the new tax regime.
In these cases as well, the old tax regime continues to be beneficial. But of course, if the number of deductions and exemptions are not significant, then one would need to make a determination based on the quantum of investments, the long-term financial plans. Do they have a year-on-year housing loan interest that has to be paid? Can one claim a house rent allowance deduction on a year-on-year basis? Based on all of those, one needs to decide whether one works better as compared to the other.
I also want to understand how many times, salaried individuals and businesses can opt in and out from the new tax regime or is it just a once-in-a-lifetime opportunity that you get to decide which tax regime you want to choose?
On an overall basis, salaried or not salaried, if a person does not have income from business and profession, they can make a change on a year-on-year basis. Now, if I look at the perspective of a salaried individual, there the tax withholding norms come into play as well. In fact, there was a CBDT circular clarifying the norms that was released on Wednesday, which basically said that at the beginning of the year, the employer will need to seek information from every single employee as to whether they would want to go in for the default new tax regime or whether they would opt in for the old tax regime. Remember that there is a flip from the current year because the new tax regime is the default from this year on.
If the person does not make a choice, does not provide an intimation to the employer of his choice, then the employer goes with the default new tax regime. And that continues for the rest of the year. But at the time of filing of the tax return, the individual will, of course, need to specifically call out the option. In the event he chooses to opt the other way, as in going for the regular tax regime at the time of tax return, filing tax return, he can very well do so at that point in time, but may possibly have to deal with some refunds at that point.
