Income tax filing: Check out the 6 key changes new tax regime brings in

02/07/2024

The financial year 2023-24 saw significant changes in the income tax landscape that affected both low-income earners as well as the affluent class.

This was triggered by a host of announcements that Finance Minister Nirmala Sitharaman made during her Budget 2023 speech. Most of the changes pertained to the new, minimal tax regime introduced in 2020, with the income tax slabs under old, with-exemptions regime remaining largely untouched.

Here are the five key changes in the new tax regime that came into effect in financial year 2023-24 and continued to influence your current tax return filing process, which you need to complete by July 31.

1. New regime is the default regime, effective 2023-24

For one, the finance minister announced that unlike previous years, when the old tax regime was the default system, the new tax regime will acquire this status from 2023-24 onwards.

For salaried employees, this meant that they had to expressly choose the old tax system as their regime of choice in their proposed investment declarations submitted to their employers. A failure to do so would mean the employer computing their tax liability as per the new tax regime – that is, without taking into account deductions such as tax-saver investments under Section 80C, health insurance premium under Section 80D, housing loan interest under Section 24(b) and so on. This could lead to excess deduction of tax from salary.

So, taxpayers with multiple deductions who are better off under the old regime need to tread carefully while filing the proposed declarations every April, which is when employers typically seek such disclosures.

To be sure, you can always switch to the regime of your choice at the time of filing returns and claim refund for the excess tax deducted. However, be prepared with the necessary documentary proofs of the deductions claimed in order to be able to address any I-T queries that may arise due to mismatch in returns and Form-16.

2. Rebate limit raised from Rs 5 lakh to Rs 7 lakh under the new regime

From FY 2023-24, individuals with taxable income of up to Rs 7 lakh are eligible for the rebate of up to Rs 25,000 under Section 87A, which essentially means that they do not have to pay any tax. Before Budget 2023, the rebate limit was Rs 5 lakh under both the regimes.

If you are a salaried tax-payer and your income is up to Rs 7.5 lakh, you will not incur any tax liability under the new regime due to the standard deduction of Rs 50,000.

However, the fact is that if such salaried individuals were to claim aggregate deductions of at least Rs 2 lakh under the old regime, in addition to the standard deduction of Rs 50,000, their taxable income will be zero.

3. Change in income tax slabs

Given that Budget 2023 was the last full-year Budget before the 2024 general elections, individual taxpayers were expecting sops to reduce their tax outgo.

Sitharaman announced a slew of measures to make the new tax regime more attractive. She brought down the number of income tax slabs under this regime from six to five. Income of up to Rs 3 lakh carries no tax liability, 2023-24 onwards.

On income of Rs 3-6 lakh, the tax rate is 5 percent. If your income is in the range of Rs 6 lakh to Rs 9 lakh, your slab is 10 percent. For the Rs 9-12 lakh slab, the tax rate is now 15 percent. Those with taxable incomes of Rs 12-15 lakh have to pay tax at the rate of 20 percent. And for those whose incomes are above Rs 15 lakh, the tax rate is 30 percent.

What this means is that for an individual who earns Rs 9 lakh, his or her tax liability comes to Rs 45,000, down from Rs 60,000 earlier.

4. Hike in basic exemption limit

Again a benefit that is limited to the new tax regime, this move pushed up the basic exemption limit from Rs 2.5 lakh to Rs 3 lakh for all individual taxpayers. The basic exemption limit under the old tax regime for individuals under the age of 60 years remains unchanged at Rs 2.5 lakh.

5. Standard deduction in the new regime

In 2023-24, the finance minister introduced standard deduction of Rs 50,000 for salaried individuals and pensioners under the new income tax regime. This move ensures parity with the old tax regime on this count.

6. Peak surcharge down to 39 percent in the new regime

To lure tax-payers in the highest slab to switch to the new tax regime, Budget 2023 brought down the peak surcharge rate down to 25 percent from 37 percent earlier. The effective tax rate for such individuals in 2023-24 is, therefore, 39 percent, down from 42.74 percent earlier.

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