The simplified personal tax regime or the New Tax Regime (NTR) was introduced with effect from the financial year 2020-21. While the tax rates under this regime were lower, no exemption and deductions were provided, with the exception of deduction for employer contribution to NPS.
Budget 2023 has focused on making this tax regime more attractive and has proposed this to be the default tax regime as of now.
Below are the changes in the new tax regime which make it attractive:
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Rationalisation of slab rates: It has been proposed to change the tax structure under the new tax regime by reducing the number of slabs to five and increasing the basic tax exemption limit to Rs 3 lakh.
| Proposed Slab rates | Tax rates (%) | |
| – | 300,000 | – |
| 300,001 | 600,000 | 5 |
| 600,001 | 900,000 | 10 |
| 900,001 | 1,200,000 | 15 |
| 1,200,001 | 1,500,000 | 20 |
| 1,500,001 | 30 |
Increase in the rebate limit under Section 87A: Currently, individuals with income up to Rs 500,000 are not required to pay taxes since the taxes on such income are provided as a rebate under Section 87A. The Budget 2023 proposals have enhanced this limit to Rs 7 lakh for individuals opting for the new tax regime.
Introduction of standard deduction of Rs 50,000 under new tax regime: This is a positive move by the government to extend the benefit of standard deduction to the new tax regime, with the objective of encouraging salaried individuals to opt for the new tax regime.
Tax impact (including education cess) considering the slab change and benefit of standard deduction
| Income level before Standard Deduction | Existing Tax under simplified tax regime | Proposed Tax after Standard deduction and new slab rates | Savings |
| 750,000 | 39,000 | – | 39,000 |
| 900,000 | 62,400 | 41,600 | 20,800 |
| 1,000,000 | 78,000 | 54,600 | 23,400 |
| 1,200,000 | 119,600 | 85,800 | 33,800 |
| 1,500,000 | 195,000 | 145,600 | 49,400 |
| 2,000,000 | 351,000 | 296,400 | 54,600 |
Reduction in Surcharge for the income above Rs 5 crore: With a view to make the new tax regime attractive for high net worth individuals, surcharge rate has been proposed to be reduced from 37 per cent to 25 per cent, for individuals with total income exceeding Rs 5 crore. With this, the maximum marginal rate for such individuals opting for the new tax regime, will be lowered to 39 per cent, from the current levels of 42.74 per cent.
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New tax regime – Not beneficial for all
Given that the new tax regime does not provide tax relief to investments and savings, a dip in investments may be seen, which may not augur well in the long run. While the attractiveness of the new tax regime has been enhanced, the regular tax regime continues to be beneficial to those who claim tax deductions relating to HRA, leave travel concessions, deductions u/s 80C in respect of contributions to PF, PPF, life insurance etc. Further the deduction relating to interest on home loans is availed by many taxpayers and would encourage them to continue under the regular tax regime.
Below is the comparative table for an individual at different salary levels, assuming following deductions are available under the old tax regime: Deduction under section 80C for Rs 1.5 lakh; Deduction for self-contribution towards NPS for Rs 50,000; Deduction for interest on housing loan Rs 2,00,000; Standard deduction of Rs 50,000. Except for standard deduction, none of these deductions will be available under the new tax regime.
| Income level | Tax payable under old regime | Tax payable under new regime | Saving under old regime |
| 500,000 | – | – | – |
| 1,000,000 | 23,400 | 54,600 | 31,200 |
| 2,000,000 | 288,600 | 296,400 | 7,800 |
| 3,000,000 | 600,600 | 608,400 | 7,800 |
| 4,000,000 | 912,600 | 920,400 | 7,800 |
| 5,000,000 | 1,224,600 | 1,232,400 | 7,800 |
While there could still be taxpayers wanting to opt for the regular tax regime due to deductions available, individuals who do not have much investments may start considering moving to the new tax regime to avoid the year-end process of claiming deductions and exemptions.
