[Opinion] Union Budget – A long awaited wave of relief for the salaried & middle class!

Authored by Ashesh R. Safi – Partner, Jigar Shah – Senior Manager, Himani Varia – Deputy Manager & Yash Agarwal – Assistant Manager | Deloitte Haskins and Sells LLP

Table of Contents

1. Introduction

2. Amendments proposed by Budget 2023

3. Concluding Remarks

1. Introduction

India has witnessed a 25% growth in direct tax collections in financial year 2022-23 over last year. The increasing trend of tax collections is a result of various reforms introduced by the government in the past years. People had high expectations from Budget 2023, with the salaried class hoping for higher deductions, while corporates were looking forward to higher incentives and measures to promote ease of doing business in India.

At the outset of the Budget speech, the Finance Minister clearly bifurcated the Budget into seven priorities ranging from infrastructure, inclusive development and tribal welfare to digitization of India. Addressing the expectations and anticipations, the government proposed capital expenditure outlay of INR 10 lakh crores, which is 33% higher compared to last year. The Budget also focused on furthering Artificial Intelligence, streamlining the KYC processes and promoting use of digilocker services.

The highlight of Budget 2023 was personal taxation as it introduced a wide range of tax reliefs for individuals. Budget 2023 clearly shifted the direction towards the new tax regime or as the Finance Minister put it, ‘the default tax regime’. The government is not looking at providing higher tax incentive for investment and insurance through deductions under section 80C.

We have summarised some important amendments proposed by Budget 2023 for individuals:

2. Amendments proposed by Budget 2023

I. Under the new tax regime/default tax regime

Budget 2023 was focused on making the new tax regime more lucrative compared to the old tax regime.

1. Limit for Rebate increased to INR 7,00,000

For the new tax regime, it is proposed to increase the income limit for tax rebate under section 87A from INR 5,00,000 to INR 7,00,000.

As a result, individuals having an annual income of INR 7,00,000 or less in a financial year, are not required to pay tax provided such income is computed as per the provisions of the new tax regime (as per section 115BAC of the Act).

It is important to note that the income limit for tax rebate under the old tax regime continues at INR 5,00,000.

2. Revamped slabs under new tax regime under section 115BAC

Budget 2023 has proposed to revamp the tax slabs under the new tax regime. The new tax slabs and the corresponding rates of tax are summarised below:

Total IncomeRate Up to INR 3,00,000 Nil From INR 3,00,001 to Rs. 6,00,000 5% From INR 6,00,001 to Rs. 9,00,000 10% From INR 9,00,001 to Rs. 12,00,000 15% From INR 12,00,001 to Rs. 15,00,000 20% Above INR 15,00,000 30%

3. Decrease in maximum surcharge rate by 12%

Currently, the surcharge rate applicable to taxpayers having total income exceeding INR 5 crores in a financial year, is 37%. As a result, their highest tax rate works out to 42.74%.

For individuals opting for the new tax regime, it is proposed to reduce the highest surcharge rate to 25%, thereby reducing the highest tax rate to 39%, under the new tax regime.

4. Standard Deduction and Family Pension to salaried employees:

At the time of introduction of the new tax regime in Finance Act, 2020, the taxpayers were not permitted to claim any deductions from their total income, including standard deduction of INR 50,000 for salaried employees.

To make the new tax regime a more lucrative option, the benefit of standard deduction of INR 50,000 on salary income has been extended.

For taxpayer earning pension income, the deduction of one-third of such pension subject to maximum limit of INR 15,000, has also been extended under the new tax regime.

II. General Amendments

5. Revision of exemption limit for leave encashment:

Under the existing law, exemption of leave encashment received on retirement of an employee (other than a government employee) was capped up to a maximum of INR 3,00,000. The Finance Minister proposed to amend this limit to INR 25,00,000, allowing a much higher exemption limit for leave encashment. The relevant notification may be issued in due course after the Finance Bill is passed.

6. Capping the upper limit of deduction under section 54 and section 54F

Sections 54 and 54F provide for deduction on long term capital gains in case the proceeds from sale of residential property (in case of section 54) or sale of any long term capital asset except residential property (in case of section 54F) are utilised for purchase of a residential house property.

However, these provisions were abused by high net worth individuals who purchased expensive houses to avoid tax impact on sale of long term capital assets. In order to put an end to this, it is proposed to cap the upper limit for claiming exemption under section 54 and 54F at INR 10 crore.

Consequently, a cap of INR 10 crore has also been introduced on the deposits to be made under the Capital Gains Account Scheme (allowed before actual purchase of a residential property).

7. Tax on maturity of life insurance policies having premium exceeding INR 5,00,000

Section 10 of the Act provided for exemption on the maturity sum or claim received under a life insurance policy. Subsequently, Finance Act, 2021 amended the section to provide that in case of Unit Linked Insurance Plans (ULIP) issued on or after 1 February 2021, if the premium payable per year exceeds INR 2,50,000, the maturity sum received shall not be tax exempt.

Finance Budget 2023 proposes to further amend this section to cover all other life insurance policies issued on or after 1 April 2023, wherein the aggregate premium paid exceeds INR 5,00,000 in a year. As a result, any sum received on maturity of any insurance policy shall not be tax exempt if the aggregate:

• • Premium paid in a year exceeds INR 2,50,000 in case of ULIP issued on or after 1 February 2021
  • Premium paid in a year exceeds INR 5,00,000 in case of other life insurance policies issued on or after 1 April 2023

The above exclusion shall not apply if the claim is received on death of the insured person.

The intent of the government seems that life insurance should not be looked at as an investment vehicle.

8. Curb on double deduction of interest on borrowed capital:

Deduction of interest on borrowed capital utilised for acquiring, renewing or reconstructing a property was allowed under the head “Income from house property” under section 24(b) of the Act. However, certain assessees while computing capital gains on sale of property, claimed the same interest as cost of acquisition/improvement of the asset as well, thereby claiming a double deduction.

In order to prevent such double deduction, a proviso is sought to be inserted in section 48(ii), to provide that interest claimed as deduction under section 24(b) shall not be considered as part of cost of acquisition/improvement.

3. Concluding Remarks

Although the government had introduced the new tax regime in 2020, large part of the salaried middle class opted to file their tax return under the old regime to ensure that relevant exemptions can be claimed. Budget 2023 has focused on making the new tax regime more attractive to taxpayers so that the old regime can be slowly phased out. The intention of the government is clear; they want to minimise the exemption regime.

Dive Deeper:
Highlights of the Finance Bill 2023
Income Tax Slab Rates for A.Y. 2024-25 | F.Y. 2023-24
Highlights of Changes Proposed in the New Tax Regime [Section 115BAC]