Should you opt for the new tax regime 2023?

Budget 2023 has pushed for adoption of the new tax regime in a big way. The major changes are the introduction of the Rs.50,000 standard deduction, full tax rebate for those earning up to Rs.7 lakh a year and a lower tax surcharge of 25% on super rich taxpayers earning more than Rs.5 crore annually. The basic exemption limit has also been raised to Rs.3 lakh, which will provide a minor relief to taxpayers. Also, the structure has been simplified by reducing the number of tax slabs from six to five (see tables). These changes were necessary because the new tax regime introduced in 2020 did not find many takers. In her Budget speech, Finance Minister Nirmala Sitharaman declared that after the introduction of the standard deduction, “each salaried person with an income of Rs.15.5 lakh or more will thus stand to benefit by Rs.52,500”.

However, though the new tax regime is a big improvement over the previous option, the revised structure has limited appeal. The threshold for rebate under Section 87A has been raised from Rs.5 lakh to Rs.7 lakh, so people in this income band will happily move to the new tax regime. Those earning above Rs.5 crore a year pay a surcharge of 37% on tax. Under the new tax regime, this has been reduced to 25%. These super rich taxpayers will also prefer the new structure.

How tax slabs will change under the new tax regime

But taxpayers between these two ends of the spectrum or those claiming deductions and exemptions of more than Rs.2.5 lakh annually may not find it beneficial. They will be better off in the old regime (see tables). It can be argued that by doing away with all deductions and exemptions, the new tax regime frees individuals from the maze of tax-saving investments. They will no longer be forced to make investments that serve no purpose in their financial portfolios. However, many of the exemptions and deductions do not require additional funds. For instance, for many individuals, their Provident Fund contributions alone take care of the deduction under Section 80C. Then there is the tuition fee of up to two children as well as the principal portion of the home loan EMI, both of which are also covered under Sec 80C.
The deduction for home loan interest and the exemption for house rent allowance (HRA) are two more reasons why the new tax regime may not click with taxpayers. Under Section 24, up to Rs.2 lakh interest paid on a home loan can be claimed as a deduction. And HRA, which is usually 25% of the total income of the salaried taxpayer, is exempt subject to certain conditions. Without tax exemption for HRA, the tax outgo of the individual can shoot up significantly. “The exemptions and deductions under the old regime reflect genuine expenses and investments of the average Indian family,” says Amit Maheshwari, Partner, AKM Global.

Investment experts are not very enthused by the proposals and feel that the intent to phase out the old tax regime could backfire. The Sec 80C deduction pushed taxpayers to salt away money in tax saving investments. Though there was widespread misselling of life insurance plans to taxpayers, other investments under Sec 80C did provide some long-term security to the individual. By not offering any deduction under the new tax regime, the government has disincentivised savings (see guest column on page 10).

The new tax regime will be the default option. “Taxpayers will have to start planning their taxes early in the financial year, because if they do not specify their preference, employers will compute and deduct tax as per the new regime,” says Archit Gupta, CEO of tax filing portal Cleartax. However, the good news is that opting for the new tax regime is voluntary and taxpayers have the choice to stay with the old structure. Even after they choose the new regime, taxpayers will have the option to switch to the old regime. “This option to switch to the old regime will be open to taxpayers even at the time of filing returns,” says Sudhir Kaushik, CEO of

Who stands to benefit from the new tax regime?
It gives a higher tax exemption, raises the rebate threshold and cuts surcharge for the super rich.
Annual income: Rs.7.5 lakh


Taxpayer will not have to invest in tax saving instruments, nor pay any tax because of full tax rebate on income up to Rs.7 lakh.

Annual income: Rs.10 lakh


The revised new tax regime is better now, but taxpayers who claim deductions of Rs.2.5 lakh or more will not gain from it.

Annual income: Rs.25 lakh


Despite inclusion of the standard deduction, the higher deductions and exemptions available under old scheme make it a better option.

Annual income: Rs.60 lakh


The gap between the tax outgo under the old and new regimes gets bigger for those in higher income groups who claim more deductions and exemptions.

Annual income: Rs.6 crore


But for super rich taxpayers earning over `6 crore a year, the reduction in the surcharge makes new regime more attractive.

Source link

Spread the word!

Leave a Comment

Your email address will not be published. Required fields are marked *