Of a new tax regime and fiscal prudence

The overarching theme of Budget 2023 is the vision of Amrit Kaal steered by seven priorities (aptly termed as ‘Saptarishi’) such as inclusive development, green growth, youth power, infrastructure and investment.

The finance minister remained steadfast on the path of stability, simplification and rationalization of tax provisions.

The budget has proposed major changes to the concessional tax regime (lower tax rates without most deductions/ exemptions) that is aimed at attracting taxpayers to switch over 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 could well turn as the following changes proposed to the new CTR could make it attractive to a large number of taxpayers. The limit of taxable income for claiming rebate will be increased from ₹5 lakh to ₹7 lakh. Individuals with taxable income of up to 7 lakh will pay no income tax under the CTR. Slab rates have been widened with lower tax rates. The basic exemption limit is proposed to be increased from ₹2.5 lakh to ₹3 lakh.

The budget has also proposed the introduction of standard deduction of ₹50,000 under CTR, which was not allowed earlier. We will therefore see many more salaried income earners make the switch to CTR.

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

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

Some other notable changes from personal tax/ finance standpoint are as follows. Proceeds from insurance policies wherein the premium exceeds ₹5 lakh in a year will now be taxable, except in case of the death of the insured. This will apply for policies issued on or after 1 April 2023.

The exemption for investment in residential house property are proposed to be capped at ₹10 crore to restrict the unlimited deduction being claimed in such high value transactions. Interest on housing loan claimed as a tax deduction will no longer be permitted to be added to the cost of acquisition/ improvement of house property when computing capital gains on sale of the house property. This move will plug a loophole which earlier allowed benefit of double deduction to a taxpayer.

The limit of tax exemption on leave encashment at the time of retirement of non-government salaried employees is proposed to be increased from ₹3 lakh to ₹25 lakh. Tax deducted at source (TDS) on withdrawal of money from provident fund for individuals not having a PAN is reduced from maximum marginal rate of tax to 20%. The threshold for applying presumptive tax rate for persons carrying out specified professions is proposed to be increased from ₹50 lakh to ₹75 lakh, subject to the condition that cash receipts are up to 5% of total gross receipts. Similarly, the threshold for small business is proposed to be increased from ₹2 crore to ₹3 crore.

The government has proposed an increase in the rate of Tax Collected at Source (TCS) on certain foreign remittances. Currently, the rate of TCS for foreign remittances for education is 0.5% and for medical treatment, the rate is 5% for remittances in excess of ₹7 lakh. There is no change in these rates. However, for foreign remittances for all other purposes under the Liberalised Remittance Scheme and purchase of overseas tour package, it is proposed to increase the rate of TCS from 5% to 20% without any threshold limit for TCS to kick in. This amendment is proposed to take effect from 1 July 2023.

Kudos to the finance minister for staying firm on the path of fiscal prudence, yet bringing some cheer to the taxpayers.

Sonu Iyer is partner & leader - India Region, People Advisory Services, EY. The views expressed here are personal.