a new tax regime and fiscal prudence

The Finance Minister stuck to the path of stability, simplification and rationalization of tax provisions.

The budget has proposed major changes in the concessional tax regime (lower tax rates without most deductions/exemptions) with an aim to attract taxpayers to move to the new Concessional Tax Regime (CTR).

While it is well known that the old tax regime failed to elicit the expected response, the tide may well turn as the following changes proposed to the new CTR may make it attractive to a larger number of taxpayers. The limit of taxable income for claiming exemption will be increased by 5 lakhs onwards 7 lakhs. Individuals having taxable income up to 7 lakhs will not have to pay any income tax under CTR. Slab rates have been widened with reduced tax rates. The original exemption limit is proposed to be increased from 2.5 Lakh onwards 3 lakhs.

Budget also proposes introduction of standard deduction 50,000 under CTR, which was not allowed earlier. Hence we will see many more salaried income earners switch to CTR.

Surcharge on taxable income of 5 crore or more under CTR is proposed to be reduced from 37% to 25%. This change directly affects high net worth individuals as it will reduce the highest income tax rate under CTR from 42.744% to 39%.

CTR has been made as the default tax regime. However, taxpayers will still have the option to opt for the old tax regime. The changes in CTR are in the right direction and will pave the way for a unified tax regime.

Here are some other notable changes from a personal tax/finance perspective. Income from insurance policies in which the premium is high 5 lakh in a year will now be taxable, except in the case of death of the insured. This will be applicable to policies issued on or after 1 April 2023.

Proposed to fix exemption limit for investment in residential house property 10 crores to restrict the unlimited deduction being claimed in such high value transactions. Interest on housing loan claimed as tax deduction shall not be allowed to be added to the cost of acquisition/improvement of house property while computing capital gain on sale of house property. The move will remove the loophole that earlier allowed a taxpayer to avail of double deduction.

It is proposed to increase the tax exemption limit on leave encashment at the time of retirement of non-government salaried employees. 3 lakhs onwards 25 lakhs. For individuals who do not have PAN, the tax deducted at source (TDS) on withdrawal of money from Provident Fund has been reduced from the maximum marginal rate of tax to 20%. It is proposed to raise the threshold for applying the presumptive tax rate to persons carrying on specified professions from 50 lakhs 75 lakhs, subject to the condition that cash receipts are up to 5% of the total gross receipts. Similarly, it is proposed to increase the limit for small traders as well. from 2 crores 3 crores.

The government has proposed to increase the rate of Tax Collected at Source (TCS) on certain foreign remittances. Currently, the TCS rate for foreign remittances for education is 0.5% and for medical treatment, the rate is 5% for remittances in excess. 7 lakhs. There is no change in these rates. However, for foreign remittances for all other purposes and purchase of foreign tour packages under the Liberalized Remittance Scheme, it is proposed to increase the rate of TCS from 5% to 20% without any threshold limit for introduction of TCS. This amendment is proposed. To be effective from 1st July 2023.

Congratulations to the Finance Minister for sticking to the path of fiscal prudence as well as bringing some happiness to the taxpayers.

Sonu Iyer is Partner and Leader – India Region, People Advisory Services, EY. The views expressed here are personal.