Decision Time: Which Tax Regime is Right for You in the Wake of India's Union Budget 2023?

The Indian government has proposed several changes in the 2023 Finance Bill to make the new personal tax regime more appealing to the general public. New regime, introduced in 2020 under section 115BAC of the Income Tax Act, has not been as popular as expected due to the requirement of giving up certain deductions. The government hopes that these changes will make the new regime more attractive.

The government has proposed important changes to the new personal tax regime under section 115BAC in the 2023 Finance Bill to encourage more individuals to switch to it. The goal is to simplify the tax filing and assessment process by reducing the number of deductions that can be claimed. The government hopes that these changes will make the new tax regime more appealing and user-friendly for taxpayers.

The new personal tax regime under section 115BAC has increased the basic exemption limit from INR 2.5 lakhs to INR 3 lakhs. The new proposed tax slab rates are as follows:

In the new personal tax regime under section 115BAC, the available limit of rebate under section 87A has been increased from INR 5 lakhs to INR 7 lakhs.

This means that individuals and HUFs with a gross total annual income of up to INR 7 lakhs will not have to pay any income tax, as the new rebate limit under section 87A offers a tax rebate of INR 25,000.

Important note to readers:

{It's important to note that this relief is in the form of a tax rebate and not an increase in the basic exemption limit. The increase in the basic exemption limit is only INR 50,000, as the limit has been raised from INR 2.5 lakhs to INR 3 lakhs.}

Therefore, if the income of an individual or HUF exceeds INR 7 lakhs, the rebate under section 87A will not be available and the newly prescribed tax rates in the table above will be applicable to such income.

Which one is better? New vs Old:

The question of which regime is more beneficial now depends on the gross annual total income of the individual or HUF.

If the gross annual total income is up to Rs 7 lakhs in fiscal year 2023-24 and beyond, it is clear that the new tax regime under section 115BAC provides a higher rebate of Rs 25,000 under section 87A, compared to the old regime's rebate limit of Rs 12,500. However, for those with a gross annual total income in excess of Rs 7 lakhs, a well-informed and considered choice must be made.

If we compare the tax rate of Old with the New regime, the new tax regime will be a clear winner as per below comparison table:

However, for those with a total income exceeding Rs. 7 lakhs, a more informed decision is necessary, as the new tax regime has no room for any deduction under chapter VI-A.

Below is the matrix to help you decide which scheme you should opt this tax filing season:

In this blog I tried to discuss that the new regime under section 115BAC has been made the default tax regime and individuals or HUFs who wish to continue with the old regime will have to opt for it. A comparison was made between the two regimes to determine which one is more beneficial for taxpayers with different levels of gross annual total income. A break-even point analysis by a matrix is done to help readers make an informed decision on which regime to choose in order to optimize their tax outflows. Stay tuned for more updates on Union budget 2023!