Finance Minister Nirmala Sitharaman on February 1 announced that individuals with an income of up to Rs 7 lakh will not have to pay any tax under the new tax regime.
They will be eligible for a rebate under section 87A that is currently available to individuals with income of up to Rs 5 lakh, she said during her Budget 2023 speech.
No rebate for taxpayers opting for the older tax regime
If you, like most other tax-payers, have been opting for the older, with-exemptions tax regime that offers tax breaks under section 80C among other things, you will not be eligible for this rebate. You will get a rebate under the old regime only if your income is less than Rs 5 lakh.
The older regime continues to be in force, but will no longer be the default tax structure.
What is a rebate?
In a bid to attract more taxpayers to the new structure, Sitharaman sweetened the deal by allowing rebate on incomes of up to Rs 7 lakh, up from Rs 5 lakh earlier. The rebate amount has gone up from Rs 12,500 to Rs 25,000. Put simply, those earning up to Rs 7 lakh will not have to pay any income tax, though will have to file returns to claim the rebate.
In addition, she has raised the basic exemption limit from Rs 2.5 lakh to Rs 3 lakh, which means the tax outgo will be lower by at least Rs 2,500 for all income tax brackets under the new regime.
Rebate vs exemptions
A rebate does not reduce the tax payable for other income brackets, while a hike in basic exemption limit benefits all.
So, in 2022-23, if your income was, say, Rs 9 lakh and you had chosen the new tax regime, you would be shelling out a tax of Rs 60,000, plus cess.
Effectively, your tax outgo will now come down to Rs 45,000 due to higher basic exemption limit and rejig of tax slabs. “An individual with an annual income of Rs 9 lakh will be required to pay only Rs 45,000. This is only 5 percent of his or her income. It is a reduction of 25 percent on what he or she is required to pay now (2022-23), that is, Rs 60,000.
The slew of changes in the new tax regime is the clearest signal so far that the central government wants to encourage taxpayers to switch to the new, minimal-exemptions tax regime, as Sitharaman announced changes in tax slabs, basic exemption and rebate limits only for the new regime.
Introduced in 2020, the new tax regime offers lower tax rates but provides minimal tax deductions and exemptions. Put simply, it does not offer popular tax benefits under section 80C such as employees' provident fund (EPF) contribution, investment in equity-linked saving scheme (ELSS), life insurance premium paid and so on.
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