In relief to the middle and salaried class, Union Finance Minister Nirmala Sitharaman during her Budget 2023 speech today proposed five major changes in personal income tax. These changes, says the FM, will primarily benefit the country's "hard-working middle class". The FM also said the Centre is also making the new income tax regime the "default tax regime". However, citizens will continue to have the option to avail the benefit of the old tax regime.
No new tax up to ₹7 lakh
The first one concerns the tax rebate. The FM proposed to increase the personal income tax rebate limit to ₹7 lakh under the new tax regime. "Currently, those with income up to ₹5 lakh do not pay any income tax in both old and new tax regimes. I propose to increase the rebate 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."
Income tax slabs reduced to 5
The second proposal relates to middle-class individuals. The FM said she had introduced, in the year 2020, the new personal income tax regime, with 6 income slabs starting from ₹2.5 lakh. "I propose to change the tax structure in this regime by reducing the number of slabs to five and increasing the tax exemption limit to ₹3 lakh. This will provide major relief to all taxpayers in the new regime."
With this, an individual with an annual income of ₹9 lakh will be required to pay only ₹45,000, only 5% of income. It is a reduction of 25% on what a taxpayer is required to pay now, ie, ₹60,000. Similarly, an individual with an income of ₹15 lakh would be required to pay only ₹1.5 lakh or 10% of his or her income, a reduction of 20% from the existing liability of ₹1,87,500.
Benefit of standard deduction
The FM's third proposal is for the salaried class and the pensioners, including family pensioners, for whom she proposed to extend the benefit of the standard deduction to the new tax regime. "Each salaried person with an income of ₹15.5 lakh or more will thus stand to benefit by ₹52,500."
Surcharge rate cut
Sitharaman's fourth announcement on the personal income tax was regarding the highest tax rate, which in our country is 42.74. "This is among the highest in the world," says the FM. "I propose to reduce the highest surcharge rate from 37% to 25% in the new tax regime," says the FM, adding that it'll result in the reduction of the maximum tax rate to 39%.
Tax exemption on leave encashment up
The limit of ₹3 lakh for tax exemption on leave encashment on the retirement of non-government salaried employees was last fixed in the year 2002 when the highest basic pay in the government was ₹30,000 per month, said the FM. "In line with the increase in government salaries, I am proposing to increase this limit to ₹25 lakh."