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The Government of India presents the Union Budget annually, outlining its revenue and expenditure for the upcoming fiscal year, including proposals for tax law and rate changes that can affect the financial planning of millions of Indian citizens.
The Finance Minister presented the Union Budget 2023-24 on 1st February 2023, introducing several changes to tax slabs and rates. These changes aim to relieve the middle class and incentivize investments in certain sectors.
The New Regime Tax System
The 2023-24 Income Tax slab rates have been revamped in the new regime. The basic exemption limit has increased to Rs. 3 lakhs. Salaried and individual taxpayers can now avail of an income tax rebate of up to Rs. 7 lakhs.
Refer to the table below for the income tax slabs for the new regime 2023.
- Up to Rs 3 lakh income, there is 0% or NIL tax
- From Rs 3 lakh to Rs 6 lakh tax rate is 5%
- From Rs 6 lakh to Rs 9 lakh the tax rate is 10%
- From Rs 9 lakh to Rs 12 lakh the tax rate is 15%
- From Rs 12 lakh to Rs 15 lakh the tax rate is 20%
- Above Rs15 lakh the tax rate is 30%
The reason behind changes in tax slab
The reasons behind changes in tax slabs in the Indian budget can vary depending on the specific budget year, but some common reasons may include:
- Promoting economic growth and development.
- Ensuring social welfare by providing tax relief to lower-income individuals.
- Achieving revenue targets to fund government spending and infrastructure projects.
- Addressing inflation and maintaining price stability.
- Encouraging compliance and reducing tax evasion.
- Aligning with the government’s long-term economic vision and policies.
Explanation of tax slabs and how they impact taxpayers
Individuals in India are taxed at different rates depending on their income, under a progressive tax structure. The tax slabs play a significant role in determining the amount of tax payable by taxpayers. Higher-income taxpayers generally pay a larger amount of tax since their tax rate is higher.
However, the tax slabs also provide relief to lower-income taxpayers, who may be exempt from paying any tax or pay a lower rate. The progressive tax structure aims to ensure that individuals with higher incomes contribute more to the government’s revenue, while those with lower incomes are not overburdened with taxes.
Potential benefits of the tax slab changes
The new income tax rate in India is advantageous for individuals with low investments in policy schemes, as it offers seven lower tax slabs. Paying taxes without claiming exemptions under the existing system provides a lower upfront tax rate, while those earning up to Rs 12 lakh and investing less than Rs 1.91 lakh may pay more under the old system. For this reason, taxpayers who invest less in tax-saving schemes are advised to opt for the new tax regime. The new optional regime for income tax in India has the advantage of simpler tax filings, which minimizes errors. Taxpayers in India can choose to switch to the optional tax regime after evaluating the previous year, with the flexibility to change. However, taxpayers with income from a business cannot switch from the old to the new system.
Potential drawbacks of the tax slab changes
The new tax regime in India provides lower tax rates, eliminating exemptions. It benefits people with low investments but harms those who already invest in tax-free savings schemes such as PPF and NPS and claim deductions on them. Even if they shift to the new system with a lower tax rate, they will pay more tax because no exemptions are available to claim. Under the current system, claiming up to Rs 2 lakh in tax deductions can lead to significant tax relief.
Conclusion
Despite the unpopularity of the new regime tax norms, they can be utilized optimally in some cases. With lowered tax slabs, easier processes, and lesser documentation, the new tax regime may suit some, especially newcomers. However, the new system may not be suitable for people who invest in tax-free savings schemes and claim deductions, as it eliminates exemptions.
