New tax rules come into effect from April 1: The new tax system, which has lower tax rates but fewer benefits and deductions, will be standard. However, taxpayers can opt for the old tax system if it is advantageous for them.
The new financial year begins on April 1, after which the Union Budget proposal on income tax comes into force. The changes were announced by Finance Minister Nirmala Sitharaman in her budget speech in February this year. Here’s an overview of some of the changes in the tax rules that take effect on April 1st.
The new tax system will be implemented by default, which will simplify the tax payment process and is expected to promote greater participation in the new system. However, taxpayers will still have the option of sticking with the old tax system if it is more beneficial for them.
The tax rates are as follows: 5% on income of 3 to 6 lakhs, 10% on income of 6 to 9 lakhs, 15% on income of 9 to 12 lakhs, 20% on income of 12 to 15 lakhs, and 30 lakhs and above is taxed at 30%.
The standard deduction of Rs 50,000, which was previously applicable in the old tax regime, will now be applicable in the new tax regime. This will further reduce taxable income under the new system.
The maximum 37% surcharge rate on income above Rs 5 crore has been reduced to 25%. The gross premium amount of proceeds from life insurance policies issued on or after April 1, 2023, is up to Rs 5 lakh. If more than 5 lakh, tax will be levied.
The tax exemption limit for non-government employees has been increased from Rs 3 lakh to Rs 25 lakh.
Benefits of introducing a new tax system
The new tax system will provide taxpayers with the following benefits:
- With the implementation of the new tax system, taxpayers are no longer required to keep travel tickets and rent receipts.
- From April 1, 2024, changes to income tax rules will free taxpayers from complicated tax planning as the changes are aimed at simplifying tax planning.
- The basic tax exemption limit has been increased from Rs 2.5 lakh to Rs 3 lakh with effect from April 1, Increasing the benefit limit makes the new tax regime more attractive| Note that Income above Rs 15 lakh is taxed at the highest tax rate of 30%.
Changes in the percentage of the surcharge rate
- With the introduction of the new tax system, the surcharge rate fell from 37% to 25%| This applies to people with incomes above Rs 5 crore.
- This lower surcharge rate is valid only for taxpayers who have opted for the new tax regime and whose income exceeds Rs 50 million.
Changes in the limits of tax exemptions
The exemption threshold was increased as the new tax system was introduced. Under the old tax regime, the applicable tax exemption limit for income up to Rs 5 lakh was Rs 12,500. However, if the taxable income is less than or equal to Rs 7 lakh, the exemption limit has been increased to Rs 25,000 under the new tax regime. Note that the exemption under Section 87A is applicable in both income tax regimes. Subsequently, during the Budget announcement, the taxable limit under the new tax regime was raised from Rs 5 lakh to Rs 7 lakh.
More deductions in the new system
- Family pension income from Rs. 15,000 or deduct 1/3rd of the pension (whichever is less).
- Deduction from the amount paid or contributed to Agniveer Corpus Fund under Section 80CCH(2).
No income tax up to Rs.7 lakh, is it?
When calculating taxes, income taxes are first calculated on a flat rate basis. The exemption is then deducted from the final tax amount and reduced to zero.
Under the new tax regime in Budget 2023, income of Rs 7 lakhs or less is given tax exemption. This means that taxpayers who opt for the new tax regime will not have to pay tax if their income does not exceed Rs 7 lakh. Therefore, it is said that there is no income tax for income up to Rs. 7 lakhs.
The standard deduction of Rs. 50,000(for employees) under the new tax system. A taxpayer (salaried employee) with an income less than or equal to Rs. 7.5 lakhs, will not have to pay tax if they opt for the new tax system.
Discounts on accrued vacation
Under the new tax system, you are exempt from paying holiday pay. In Budget 2023, the ceiling of leave pay exemption for non-government employees has been increased from Rs 3 lakhs to Rs 25 lakhs. So at retirement, the leave encashment amounting up to Rs. 25 lakhs is free from tax, as per Section 10(10AA).
Let me return to the old tax system
- The new income tax system will be implemented as the standard tax system from FY 2023-24.
- If you plan to go back to the old tax system, you must file the form (Form 10-IEA) when filing your tax return.
- How often you switch between the old and new tax systems depends on your income type. When it comes to commercial or business income, switching between old and new tax systems is a once-in-a-lifetime experience. But if it’s income other than business/professional income, you can switch between the old and new tax regimes every year.
About Life Insurance Policies
- According to the Budget 2023 announcement, from April 1, 2024, policyholders will have to pay taxes, having a yearly premium of over Rs. 5 lakhs. Note that the relevant changes in income tax rules do not apply to individual insurance plans (ULIPs).
- The amount received from a life insurance policy is tax-free as long as the policy premium does not exceed 10% of the sum assured.
- However, there are situations when taxpayers abuse this exemption by investing in policies that pay higher premiums and require higher tax benefits. Thus, under the new tax regime, if the annual premium for the year will be Rs. 5 lakhs, the amount received will be taxed.
Fixed taxation has changed
A flat rate tax system is a simple method proposed by tax authorities to calculate the taxable income of certain eligible businesses or businesses. The rules allow the taxpayer to report income at a flat rate based on certain assumptions instead of keeping detailed records and performing complex calculations. Probabilistic tax planning works in both old and new tax systems.
