Save More Under New Tax Regime

FINANCE MINISTER Nirmala Sitharaman has proposed several changes to the new income tax regime in a relief to middle income taxpayers. The most important is increase in personal income tax rebate limit to ₹7 lakh under the new tax regime. "At present, those with income up to ₹5 lakh do not pay income tax under both old and new tax regimes. I propose to increase the limit to ₹7 lakh in the new tax regime. Thus, persons in the new tax regime with income up to ₹7 lakh will not have to pay any tax,” she said in her Budget speech. The finance minister also increased the basic exemption limit under the new regime from ₹2.5 lakh to ₹3 lakh, while reducing the number of tax slabs from six to five and extending the benefit of standard deduction to those opting for the new regime. She had introduced the new personal income tax regime in 2020 with six slabs starting from ₹2.5 lakh. The new regime will be the default option, though individuals will be able to continue with the old regime that has higher effective tax rates but far more exemptions. The government has also proposed to reduce surcharge on the highest rate from 37% to 25% in the new regime. Will these announcements benefit taxpayers? Here’s what taxation experts have to say.

Push Towards New Tax Regime: Too Soon

The shift to the new or simplified tax regime has been sudden, says Aarti Raote, partner, Deloitte India. “We expected a gradual shift.” Raote says an individual who has been investing in public provident fund or life insurance to meet financial goals as well as avail tax benefits will have to keep incurring these expenses even after switching to the new system given that these investment commitments are long-term in nature. That is why the expedited push towards the new regime may not work, she says.

The new rates show government is serious about promoting the new system, says Saraswathi Kasturirangan, partner, Deloitte India. D. P. Singh, deputy managing director & chief business officer, SBI MF, believes relief in personal income taxes under the new regime is likely leave more money in hands of taxpayers and act as a sentiment and consumption-booster for economy.

Raote of Deloitte India is optimistic about the benefits of the new tax regime. “It will reduce documentation phenomenally.”

Current vs Proposed

The increase in exemption limit from ₹5 lakh to ₹7 lakh will bring cheer to many taxpayers. Under the current new tax regime, a person with income of ₹7.5 lakh has to pay ₹39,000 as tax. This will become zero after the changes proposed under the new regime are implemented. Take another example. A taxpayer with income of ₹10 lakh pays ₹78,000 tax. In the new regime, he will have to shell out ₹54,600, saving ₹23,400. Similarly, a taxpayer with income of ₹20 lakh will save ₹54,600 under the proposed tax regime.

Aarti Raote of Deloitte India says it is not reasonable to compare the two regimes due to exemptions under different Sections. “The old tax regime and the new proposed tax regimes are difficult to compare due to various deductions availed by different individuals. An individual taxpayer needs to check which one saves him more tax,” says Raote. Budget proposals have narrowed the difference in rates between old and new tax regimes, she adds.

The finance minister also announced a next-generation common income tax return form to improve taxpayer services. She also rolled out a one-time small savings scheme, Mahila Samman Savings Certificate, for a two-year period up to March 2025. This scheme will accept deposits up to ₹2 lakh at a fixed rate of 7.5% with partial withdrawal option. The deposit can be made in the name of a woman or a girl child.

The Budget has also proposed an increase in maximum deposit limit for Senior Citizen Savings Scheme from ₹15 lakh to ₹30 lakh. The maximum deposit limit for Monthly Income Account Scheme will be enhanced from ₹4.5 lakh to ₹9 lakh for single accounts and ₹9 lakh to ₹15 lakh for joint accounts.

In insurance, income from traditional insurance policies where premium is over ₹5 lakh will no longer be exempt from taxes. “It has been proposed that in cases where aggregate premium for life insurance policies—other than unit-linked insurance plans—issued on or after April 1, 2023, is above ₹5 lakh, income will not be exempt,” said Sitharaman. However, she made it clear that the new tax rule will keep death benefit exempted.

However, Budget has no big announcements for the real estate sector that can act as immediate booster shots, says Anuj Puri, chairman, ANAROCK Group. But he says the 66% rise in allocation for PM Awas Yojana to over ₹79,000 crore will boost the affordable housing segment. “Affordable housing was flagging due to increased input costs and also because buyers in this segment, mostly from the unorganised sector, were still reeling under the impact of the Covid-19 pandemic.” It is another step towards government's Housing For All mission, he adds.