The Finance Minister presented the Union Budget 2023 today. In the past, taxpayers have had big expectations from the Union Budgets but the budget announcement turned out to be a damp squib. Yes, there are always policy changes but not many seem to affect the salaried class directly.
The Union Budget 2023 is an exception. There are many changes that affect taxpayers like you and me directly. Both positive and negative.
Let’s quickly jump onto the budget proposals.
#1 Big Relief under the New Tax Regime
Under the new tax regime, you get the advantage of concessional tax rates, but tax deductions are not allowed. So, you had the option of choosing between:
- The old tax regime with higher tax rates but with tax deductions
- The new tax regime with lower tax rates but without any tax deductions
While the new tax regime was introduced in the Union Budget 2020, there were not many takers for the scheme since the difference between the net tax paid between the two regimes was not too much.
In this budget, the Government has incentivized adoption of the new tax regime.
- The tax rates have been lowered.
- The eligibility of rebate under Section 87A enhanced from Rs 5 lacs to Rs 7 lacs if opting for the new tax regime. No change under the old tax regime.
- Standard deduction of Rs 50,000 now permitted for Salaried persons and pensioners. Was not permitted earlier.
- Surcharge for income over Rs 5 crores reduced from 37% to 25%, if opting for the new tax regime.
- New tax regime shall be the default option.
| Old Tax Regime (With Tax Deductions) | New Tax Regime (without deductions) | |||||
| Existing | Proposed in Union Budget 2023 | Existing | Proposed in Union Budget 2023 | |||
| Taxable Income | Tax Rate | Tax Rate | Taxable Income | Tax rate | Taxable Income | Tax rate |
| Up to Rs 2.5 lacs | NIL | No Change | Up to Rs 2.5 lacs | NIL | Up to Rs 3 lacs | 0% |
| Rs 2.5 lacs – Rs 5 lacs | 5% | No Change | Rs 2.5 lacs – Rs 5 lacs | 5% | Between Rs 3 lacs and Rs 6 lacs | 5% |
| Rs 5 lacs – Rs 10 lacs | 20% | No Change | Rs 5 lacs – Rs 7.5 lacs | 10% | Between Rs 6 lacs and Rs 9 lacs | 10% |
| Rs 7.5 lacs – Rs 10 lacs | 15% | Between Rs 9 lacs and 12 lacs | 15% | |||
| Above Rs 10 lacs | 30% | No Change | Rs 10 lacs- Rs 12.5 lacs | 20% | Between Rs 12 lacs and Rs 15 lacs | 20% |
| Rs 12.5 lacs – Rs 15 lacs | 25% | |||||
| Above Rs 15 lacs | 30% | Above 15 lacs | 30% | |||
| No changes in tax rates announced for the old tax regime in Union Budget 2023. | ||||||
| Rebate of Rs 12,500 for taxable income unto Rs 5 lacs under old tax regime. Rebate of up to Rs 25,000 for taxable income up to Rs 7 lacs under new tax regime. Limit enhanced from Rs 5 lacs to Rs 7 lacs in the Union Budget 2023. Standard deduction of Rs 50,000 for salaried persons and pensioners under old regime. The benefit of standard deduction extended to the New Tax Regime in Union Budget 2023. | ||||||
| Surcharge of 10% on income tax if the taxable income is between Rs 50 lacs and Rs 1 crore. | ||||||
| Surcharge of 15% on income tax if the taxable income is between Rs 1 crore and Rs 2 crores. | ||||||
| Surcharge of 25% on income tax if the taxable income is between Rs 2 crores and Rs 5 crores. | ||||||
| Surcharge of 37% on income tax if the taxable income is above Rs 5 crores (under old regime). Surcharge of 25% if you have opted for the new tax regime. | ||||||
| Cess at 4% applicable over income tax and surcharge. | ||||||
| Total Income | Standard Deduction | New Tax Regime Existing | New Tax Regime Proposed in Union Budget 2023 | Difference | ||||
| Net Tax Liability (before Cess and Surcharge) | Net Tax Liability under existing New Regime + Cess | Tax liability | Rebate under Section 87A (up to 7 lacs) | Net Tax Liability | Tax Liability (including Cess) | |||
| 300,000 | 50,000 | – | – | – | – | – | – | – |
| 500,000 | 50,000 | – | – | 7,500 | 7,500 | – | – | – |
| 700,000 | 50,000 | 32,500 | 33,800 | 20,000 | 20,000 | – | – | 32,500 |
| 750,000 | 50,000 | 37,500 | 39,000 | 25,000 | 25,000 | – | – | 37,500 |
| 900,000 | 50,000 | 60,000 | 62,400 | 40,000 | – | 40,000 | 41,600 | 20,000 |
| 1,000,000 | 50,000 | 75,000 | 78,000 | 52,500 | – | 52,500 | 54,600 | 22,500 |
| 1,250,000 | 50,000 | 125,000 | 130,000 | 90,000 | – | 90,000 | 93,600 | 35,000 |
| 1,500,000 | 50,000 | 187,500 | 195,000 | 140,000 | – | 140,000 | 145,600 | 47,500 |
| 1,550,000 | 50,000 | 202,500 | 210,600 | 150,000 | – | 150,000 | 156,000 | 52,500 |
| 2,000,000 | 50,000 | 337,500 | 351,000 | 285,000 | – | 285,000 | 296,400 | 52,500 |
| 2,500,000 | 50,000 | 487,500 | 507,000 | 435,000 | – | 435,000 | 452,400 | 52,500 |
| Difference in tax liability due to change in tax slabs and tax rates, proposed standard deduction and enhancement of eligibility for rebate under Section 87A. | ||||||||
| Standard deduction of 50,000 considered for Proposed New Tax regime. Standard deduction only applicable for salaried employees and pensioners. Cess of 4% and Surcharge not considered. | ||||||||
No changes have been made to the old tax regime.
Even with these changes, you need to see if the new tax regime is beneficial to you (compared to old tax regime). Old tax regime continues to offer tax benefits under Section 80C, HRA, Section 80D, Section 24 (home loan interest payment) etc.
#2 High Premium Insurance Policies Brought under the Tax Net
Insurance plans have long been used to generate tax-free returns. The Government didn’t like this since it was a way for High Net worth individuals (HNIs) to avoid paying taxes on their income/returns. And the Govt. set out to correct this.
The Government brought ULIPs under the tax net in Budget 2021. If the aggregate annual premium for ULIPs is more than Rs 2.5 lacs, the maturity proceeds from such plans are taxable.
However, the traditional plans (endowment plans) still evaded the tax net. The Budget 2023 proposes to change this.
If the annual premium for any life insurance plan (excluding ULIPs) exceeds Rs 5 lacs, the maturity proceeds from such plans will be taxable.
This applies to all life insurance plans (excluding ULIPS) issued on or after April 1, 2023. High premium ULIPs are already under the tax net.
The limit of Rs 5 lacs is the aggregate limit for all life insurance plans (excluding ULIPs), issued on or after April 1, 2023. So, you can’t buy two traditional plans with annual premiums of Rs 3 lacs each to escape tax.
The maturity proceeds shall be taxed as “Income from Other sources” and not as “Capital Gains”. You pay tax at your marginal rate. A big hit if you were taking this route to avoid tax on income/returns.
You can subtract the premium paid from the maturity proceeds only if you did not claim tax benefit for the premium paid under Section 80C.
As I understand, even if you have claimed deduction under Section 80C, you would have claimed the benefit for only up to Rs 1.5 lacs. From the maturity proceeds, you can deduct only that portion of premium for which you didn’t claim any tax deduction. For instance, if you pay Rs 6 lacs as annual premium, you should be able to adjust Rs 4.5 lacs (Rs 6 lacs – Rs 1.5 lacs) from the maturity amount.
Death benefit from all kinds of life insurance companies continues to be exempt from tax.
This is a huge blow to life insurance companies.
#3 Tax Benefit under Section 54 and Section 54F Capped
Section 54 allows investors to save capital gains tax on sale of residential property by buying/constructing a new house within a period of 1 year before and 2/3 years after the sale of property.
Section 54F allows investors to save capital gains tax on sale of any capital asset (except residential property) by buying/constructing a new house within a period of 1 year before and 2/3 years after the sale of capital asset.
Currently, there is no limit to how much capital gains you can set off under these provisions.
The Government thinks that these provisions are being abused by HNIs to avoid paying capital gains taxes by purchasing expensive residential properties.
Therefore, in the Union Budget 2023, the Government has proposed to cap the cost of the house bought to seek relief under Section 54 and 54F to Rs 10 crores. Even if you buy a house worth Rs 20 crores, the cost of the new asset for relief under Sections 54 and 54F shall be considered as Rs 10 crores.
This is a bigger hit for Section 54F. Because Section 54 considers only capital gains. Section 54F considers net consideration from the sale of asset. And the capital gain is only a part of the consideration.
#4 Enhancement of Limit under Senior Citizens Savings Scheme
The investment limit under the Senior Citizens Savings scheme (SCSS) has been enhanced from Rs 15 lacs to Rs 30 lacs. This is a very good move. Senior Citizens can earn good returns on a risk-free product. If your spouse is also a senior citizen, you can invest Rs 30 lacs each.
The investment cap for investment under Post-office Monthly income scheme (POMIS) has also been enhanced from Rs 4.5 lacs to Rs 9 lacs (for single account) and from RS 9 lacs to Rs 15 lacs for joint accounts. I see limited merit in this product.
#5 Introduction of Mahila Samman Savings Certificate
It is a new small savings scheme. Can be opened for women and minor girls. 2-year deposits of up to Rs 2 lacs. Interest rate of 7.5% p.a. With a partial withdrawal option. No clarity about tax treatment. It makes for good optics, but in the absence of any tax benefit, I see limited merit in this product, especially when FD interest rates are already around 7% p.a.
#6 Increase of TCS on Outward Remittances
This is a blow if you are doing outward remittance under the Liberalized Remittance Scheme (LRS) for any purpose except education and medical treatment.
So, if you are planning to invest in foreign stocks such as Amazon, Apple and Google directly, we have a problem. Earlier, you could send up to Rs 7 lacs without any TCS (tax collection at source). Above that amount, you had to pay 5% TCS. However, now, TCS will be flat 20% without any threshold.
Of course, you can claim this back at the time of filing returns, but this is a pain nonetheless.
#7 Disallowing Taking Tax Benefit for Home Loan Interest Twice
You take tax benefit for home loan interest paid under Section 24. However, the Government has found that some taxpayers include this interest paid in calculating the “Cost of Acquisition” too. You can’t have both.
Essentially, you can add the interest cost to the Cost of acquisition if you haven’t taken tax benefit for the interest paid under Section 24. Kind of either-or. This is a much-needed clarification.
#8 Enhancement in Cap for Presumptive Taxation for Professionals
The cap for presumptive taxation under Section 44ADA for professionals (doctors, Chartered Accountants etc.) has been enhanced from Rs 50 lacs to RS 75 lacs.
Under presumptive taxation, a professional can present only 50% of gross receipts for taxation. The only condition is that you shouldn’t have received more than 5% of your gross receipts in cash.
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