[Opinion] Finance Bill 2023 | Personal Tax Related Amendments

Authored by Mayank Mohanka – Senior Partner | M/s S M Mohanka & Associates & Founder Director | TaxAaram India Pvt Ltd.

Yes, it was the Budget Day Eve. Two close friends, ‘Dhani Ram’ and Buni Ram’ went out for their usual stroll, in late evening.

Dhani Ram – “Yaar Buni, you seem to be very happy today. What’s the good news?”

Buni Ram – “Yes Dhani, I am happy because I have heard that in today’s Budget, the Govt. has increased the income tax exemption limit to Rs 7 lakhs, so I will not have to pay any income tax now, I think.”

Their Common Friend ‘Gyani Ram’ who was listening to their talks joined their stroll and said, “Well my Friend, you are right to a certain extent, but let me further clarify.”

Buni Ram- “Oh Gyani, Thank God, you are here. We couldn’t think of a more competent person to remove our confusion regarding the personal tax related budget amendments announced today, so please help and guide us.”

Gyani Ram – “My Friend, that’s so kind of you. Yes, as per the Budget announcement today, all individuals and HUFs having their annual taxable incomes upto Rs 7 lakhs won’t be required to pay any income tax now, but this relaxation is in the form of a rebate u/s 87A and not in the form of an increase in basic tax exemption limit and more importantly, this relief of increased rebate limit from the existing Rs 5 lakhs to Rs 7 lakhs, has been made available only in the new personal tax regime u/s 115BAC, and not in the old regular tax regime with 80C/80D exemptions. If you continue with the old regular regime, then the relief in respect of rebate limit is only upto Rs 5 lakhs.”

Buni Ram- “Ok, Gyani, that clears a lot of things. So, it means that I should switch to the new regime, then?”

Gyani Ram- “Yes, Buni, beyond any doubt.”

Dhani Ram – “Gyani, I do understand that the Govt. has introduced a new personal tax regime with reduced tax rates but for that we are required to forgo our deductions in respect of our standard deduction, 80C investments like LIC, PF, Home Loan Repayment, Interest on home loan, 80D Mediclaim, HRA etc., so we have not opted for the same.”

Gyani Ram- “Yes Dhani, you are absolutely right. This compulsory requirement of foregoing of so many otherwise available deductions has made this new regime very less popular and with few takers only. But the Govt. wants more and more individual taxpayers to switch to the new regime, to reduce the complexities in return filing and assessments arising out of the plethora of deduction claims of the taxpayers, applicable in the old regime, and that is why in today’s Budget, a lot of other announcements have also been made, in addition to the announcement of increase in rebate limit to Rs 7 lakhs, in the new regime.”

In the meanwhile, their friend ‘Mani Ram’, also joined them and asked Gyani Ram, “Well Gyani, I have also heard that now we can claim standard deduction of Rs 50,000 in respect of our salary income, also in the new regime, which was not available before. Is it right?”

Gyani Ram- “Yes, Mani, you are absolutely right. Now standard deduction of Rs 50,000 in respect of your salary income can also be claimed in the new regime, and that’s a big incentive for switching to the new regime. Also, the basic exemption limit has been increased from Rs 2.5 lakhs to Rs 3 lakhs in the new regime. Further, tax slabs in new regime have also been relaxed a bit now and these new relaxed slab rates are: upto 3,00,000 – Nil Tax; 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% and above 15,00,000 – 30%.”

Dhani Ram- “Well Gyani, that sounds quite relaxing. So, should I now switch to the new regime then?”

Gyani Ram- “Look Dhani, I have done some break-even point analysis and as per my calculations, all individuals having their annual taxable incomes above Rs 15 lakhs should consider continuing with the old regime, only, if their available deductions other than standard deduction of Rs 50,000 u/s 16, viz. deductions available u/s 80C- LIC, PF, home loan principal repayment etc and 80D- Mediclaim, 24(b)- Interest on home loan for self-occupied property or HRA (if eligible) etc., exceeds Rs 3,75,000 in a year.

But, if such available deductions are equal to or less than Rs 3,75,000 in a year, or if they don’t want to block their disposable funds in making such investments of Rs 3,75,000, then they should definitely switch to the new regime to reduce their income tax liability.”

Dhani Ram- “Wow Gyani, that’s quite precise working on your part. Thanks a lot for giving so much of clarity.”

Mani Ram- “Gyani, what about me?”

Gyani Ram- “Yes, Mani Bhai, as per my calculations, those individuals earning an annual income of Rs 10,00,000 should consider continuing with the old regime only, if their available deductions other than standard deduction viz. deductions available u/s 80C/80D/24(b)/HRA (if eligible) etc., exceed Rs 2,50,000 in a year, otherwise they should switch to the new regime.

Also, for individuals earning annual income of Rs 12,50,000, the break-even figure of available deductions other than standard deduction comes out at Rs. 3,12,500 and for annual income of Rs 15,00,000 this figure of deduction, other than standard deduction, works out at Rs. 3,58,000.

One more important thing. In today’s budget, it has also been announced that now double deduction in respect of your home loan principal repayments and interest can’t be claimed first u/s 80C/24(b) and subsequently as cost of acquisition u/s 48, while computing capital gains on sale of such house property.

As a natural corollary, if your home loans’ principal and interest EMIs constitute a sizeable chunk of your available deductions, and if you intend to sell-off your house in future, then you may also consider forgoing the deduction in respect of home loan principal repayments u/s 80C and interest u/s 24(b) presently, and conveniently opt for the new regime, as you can claim the same as your cost of acquisition or cost of improvement in respect of such house property in computing the capital gains, at the time of its sale.

Mani Ram- “Awesome Gyani, your knowledge and wisdom fully justify your Name. You are simply great.”

Gyani Ram- “Friends, there is one more Cherry on the Cake in today’s Budget. The exemption limit in respect of leave encashment has been increased from existing Rs 3 lakhs to Rs 25 lakhs, for non-government salaried employees.”

All three Friends- “That’s great Gyani Bhai. But our Wives will get angry with us now, as this increased exemption limit will probably prompt us not to take leaves or encash the same while doing our jobs and encashing them only at retirement.”

A laughter followed…

Dhani Ram- “Yaar Gyani, my Boss was also looking very happy today in office. He is an HNI. Is there any relaxation for HNIs also in today’s Budget?”

Gyani Ram- “Yes Dhani, in today’s Budget, the existing Surcharge Rate for HNIs earning annual incomes in excess of Rs 5 crores, has been reduced from the existing 37% to 25%, in the new personal tax regime u/s 115BAC. As such, the effective tax rate for such HNIs will reduce substantially from the existing rate of 42.74% to 39%, in the new regime. So, such HNI’s will also shift to the new regime, for sure.

But Dhani, I must add here that this Budget is a balanced budget. So, if on one hand, the surcharge rate for such HNIs has been reduced, but on the other hand, the maturity proceeds from life insurance policies undertaken by such HNIs, having an annual premium in excess of Rs 5 lakhs, has now been made taxable w.e.f. 1.4.2023. Similarly, the deduction available in respect of capital gains, on purchase of new residential house u/s 54/54F has also been restricted to Rs 10 crores in a year. Further, the TCS rate has been increased from 5% to 20% in respect of foreign remittances, in respect of Overseas Tour Packages and also in respect of foreign remittances other than for education and medical purposes in excess of Rs 7,00,000 in a year, by resident individuals, under the Liberalized Remittance Scheme (LSR).

Dhani Ram- “Gyani, tomorrow I will make my Boss aware of all these amendments also, so that he also becomes conversant with all these and may take a well-informed decision.”

All three Friends to Gyani Ram- “Yaar Gyani, so what we need to do now to switch to this new regime then?”

Gyani Ram- “Friends, you don’t need to do anything, as for the coming FY 2023-24, this new regime u/s 115BAC has been made the ‘by-default tax regime’ for all individuals and HUFs. Now only those who wish to opt for the old regular regime need to file an electronic declaration for opting the old regime, before filing of their returns.

All Friends exclaimed- “Wow, that’s a big relief too!!”

It was when all friends crossed Ramu Kaka’s famous ‘Kirana Store’ while strolling, that Ramu Kaka shouted and asked Gyani- “Gyani Babu, what is there in today’s budget for me?”

Gyani Ram replied- “Ramu Kaka, the threshold limit of presumptive taxation u/s 44AD has been increased from existing Rs 2 crores to Rs 3 crores w.e.f. FY 2023-24 and onwards. So, in view of your ever increasing sales, you being the only available good grocery store in our vicinity, now you can think of opting for this presumptive tax regime of declaring your annual income at 6% of your sales, without there being any requirement to maintain any books of accounts or tax audit.”

Ramu Kaka- “Wow Gyani, that’s some good news. I will definitely avail this presumptive taxation scheme now.”

All three Friends- “Yaar Gyani, with your tremendous Gyan, you have addressed all our queries and have removed all our confusion and dilemma concerning the choice between old and new regime. Now, all of us will become a little more Dhani (wealthy) in terms of tax savings. Thanks Brother.”

Gyani Ram- “Friends, only thanks won’t work now, you all will have to take me to our beloved ‘Meetha Ram’s Misthan Bhandar’ and treat me there with some hot piping Kachoris and Jalebi.”

The Friends’ Stroll continued to Meetha Ram’s Misthan Bhandar, with sounds of Laughter…….

Dive Deeper:
Highlights of the Finance Bill 2023
Income Tax Slab Rates for A.Y. 2024-25 | F.Y. 2023-24
Union Budget 2023-24 | 45+ Recommendations and Expectations