[Opinion] Post Budget, Why Certain Employees May Want a Reduced Salary!

Mayank Mohanka – [2023] 147 taxmann.com 230 (Article)

With a view to make the new personal tax regime u/s 115BAC more attractive and to encourage more and more individuals to switch to the new regime, in order to reduce the perceived complexities in return filing and assessments arising out of the plethora of deduction claims of the taxpayers, applicable in the old regime, the Union Budget 2023 has increased the available limit of rebate u/s 87A, from existing Rs. 5 lakhs to Rs. 7 lakhs in the new personal tax regime, w.e.f. financial year 2023-24 and onwards.

It needs to be understood here that the above relief is in the form of a tax rebate u/s 87A only and not by way of an increase in the basic exemption limit in the personal tax slabs. The relief in the form of increase in the basic exemption limit in the personal tax slabs in the new regime is only amounting to Rs. 50,000 as the basic exemption limit has been increased from existing Rs. 2.5 lakh to Rs 3 lakh in the new personal tax regime.

Thus, the individuals and HUFs opting for the new regime in FY 2023-24 and onwards, and having their annual Gross Total Income (GTI) of upto Rs 7 lakhs, other than long-term capital gains on listed securities u/s 112A of the Act, will not be required to pay any income tax, as they will be able to claim a rebate of Rs 25,000 u/s 87A of the Income Tax Act.

However, what if one earns just 5 Rupees more than the annual GTI of Rs 7 lakh, i.e., Rs 7,00,005?

Let us understand this with the help of an example. Suppose Mr. A is a salaried employee working in M/s ABC Pvt Ltd, drawing an annual Salary income of Rs. 7,50,005 in the FY 2023-24.

So, what will be his income tax liability, if he opts for the new regime u/s 115BAC?

As per the budget amendment, Mr A will be able to claim the standard deduction of Rs 50,000 from his annual salary income of Rs. 7,50,005, even under the new regime.

So, his annual GTI, after claiming the allowable deduction in respect of standard deduction of Rs 50,000 will come out at Rs. 7,00,010 after rounding off u/s 288A.

Now in this case, the annual GTI of Mr A, is in excess of the specified threshold limit of rebate of Rs. 7 lakhs income, u/s 87A, just by Five Rupees only, but as per the existing schema of the prescribed tax slabs in the new regime, Mr A will not be able to claim the rebate of Rs 25,000 u/s 87A, and his entire GTI of Rs 7,00,010, will become taxable, at the applicable slab rates in the new regime.

The income tax liability of Mr A in this case, will come out at Rs. 26,000 (Rs. 25,000 as basic income tax and Rs. 1,000 as health and education cess).

Thus, just Five Rupees of an additional income in excess of Rs 7 lakh, will force Mr A, to shell out an additional income tax amount of Rs. 26,000/-. Had his GTI was only Rs. 7 lakhs, and not Rs. 7,00,005, he wouldn’t have been required to pay any income tax.

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