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Budget 2023: Decoding Personal Taxation The tax slabs under STR have been simplified further, with the proposed reduction of the total slabs from 6 to 5 and increase of basic exemption limit to INR 3 lakhs

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The Union Budget 2023 was presented in the Parliament on February 1, 2023. The Finance Minister (FM) has over the years attempted to bring in small changes by moving away from the traditions followed by her predecessors. One big example is moving to a digital tablet from the iconic red briefcase. This year was no different. Typically, while presenting the Budget, FMs open proposals for tax with the suggested changes to direct tax, followed by the indirect tax measures; this year the FM reversed the trend by announcing personal tax proposals in the end in true Bollywood fashion wherein the climax is unveiled at the last. As they say, keep the good things for the last.

While no changes were proposed to slab rates under the old tax regime (OTR) including deductions under 80C (life insurance/PPF/EPF etc), 80D (medical insurance), 80TTA (deduction against interest earned on savings account), a slew of changes were announced under the Simplified Tax regime ("STR").

The tax slabs under STR have been simplified further, with the proposed reduction of the total slabs from 6 to 5 and increase of basic exemption limit to INR 3 lakhs. A comparison of the changes proposed have been provided below:

Tax rates in New Simplified Regime Pre and post Budget 2023

Lower Income

Higher Income

Pre Budget rates

Post Budget Rates

0

2,50,000/-

0%

0%

2,50,001/-

3,00,000/-

5%

0%

3,00,001/-

5,00,000/-

5%

5%

5,00,001/-

6,00,000/-

10%

5%

6,00,001/-

7,50,000/-

10%

10%

7,50,001/-

9,00,000/-

15%

10%

9,00,001

10,00,000/-

15%

15%

10,00,000/-

12,00,000/-

20%

15%

12,00,001/-

12,50,000/-

20%

20%

12,50,001/-

15,00,000/-

25%

20%

15,00,001/- and above

30%

30%

A move that was much anticipated was the introduction of standard Deduction of INR 50,000/- and deduction on account of family pension of INR 15,000/- under the STR, which in the past was restricted to the OTR.

Therefore, by applying the benefit of lower slab rates and standard deduction, an individual will benefit by INR 52,500 (excluding impact of surcharge and education cess) if his income is more than INR 15.5 lakhs.

In a move to also benefit high net worth individuals ('HNIs'), Budget 2023 has proposed to remove the surcharge of 37% on income above INR 5 crores, for people opting for STR, and restrict the same to 25%. Therefore, the maximum tax rate in case of individuals with income of more than INR 5 crore, opting for STR, shall reduce to 39% from existing 42.744%.

The above change in surcharge has not been proposed under the OTR where the maximum tax rate continues at 42.744%.

In addition to the above tweaking, a close reading of the memorandum reveals that under the STR, anyone drawing an income of up to INR 7.5 lakhs, would no longer be required to pay any taxes, per the rebate permissible under Section 87A and the standard deduction. This will also hold true for similar income bracket under the OTR provided the individual claims rebate as specified above and has deductions to the tune of INR 2.5 lakhs.

Hence, the decision between STR and OTR ultimately comes down to the amount of exemptions and deductions available to the assessees. To pick up an example, an employee earning a gross income of INR 15 Lakhs will prefer the STR, if his overall exemptions and deductions (like HRA, LTA, deductions under 80C, 80D etc and, also standard deduction of INR 50,000) are lower than INR 4.08 lakhs, and the OTR, if the same are more than INR 4.08 lakhs.

Similarly, an individual earning more than INR 15.5 lakhs and up to INR 5 crores will prefer STR if his exemptions and deductions are lower than INR 4.25 lakhs and OTR if it is more than 4.25 Lakhs. Having said that, anyone earning above INR 5 crores would typically go for STR given the difference in surcharge rates.

While the STR was announced in Budget 2020, it failed to pick up momentum till now. However, with the changes proposed, it is now in a better position to sway the population towards it, especially HNIs.

One change which is common under both the regimes, is the proposal to increase exemption limit for leave encashment. It is proposed to increase the exemption against leave encashment for non-government employees from INR 3 lakhs to INR 25 lakhs. This will particularly help individuals who serve under different employers and people near retirement.

Moving away from the benefits given above, Budget 2023 has proposed to restrict the long-term capital gain exemption available under section 54/54F, to INR 10 crores. The original objective of sections 54 and 54F was to mitigate the acute shortage of housing and give impetus to house building activity. However, it was observed by the government that claims of huge deductions by HNIs are being made under these provisions, by purchasing very expensive residential houses. This was defeating the very purpose of the section. It seems that the limit has been proposed to prevent this aspect.

Continuing its stance to tax HNIs, the government has further proposed to tax the sum received under life insurance policies (other than ULIPs) taken on or after 1 April 2023, where the premium/aggregate of premiums paid in any year exceeds INR 5 lakhs. The amount received in excess of the aggregate of the premiums paid (to the extent not claimed as a deduction under any other provision) to be taxed under the head "Income from other sources" in the manner to be prescribed. Please note that the change is not applicable to proceeds received on the death of an individual.

Overall, the Budget has tried to look at all stratas of society and meet most of the expectations other than the savings schemes. It seems to be a step in the right direction of ensuring that taxes are simplified for the individual through a movement to the STR. To what extent these are achieved one can only wait to see in coming years.

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