In a major personal tax rejig, Finance Minister Nirmala Sitharaman announced that taxpayers could avail a tax rebate on income up to ₹7 lakh from the current ₹5 lakh. But this change in rebate will only be available under the new income tax regime.
The announcements came as part of Sitharaman's fifth consecutive Union Budget speech.
"An individual with an annual income of ₹9 lakh will be required to pay only 45,000. This is only 5 per cent of his or her income. It is a reduction of 25 per cent on what he or she is required to pay now, ie, ₹60,000. Similarly, an individual with an income of ₹15 lakh would be required to pay only 1.5 lakh or 10 per cent of his or her income, a reduction of 20 per cent from the existing liability of ₹1,87,500", she said in her budget.
Further, the new income tax regime will be the new default tax option, though taxpayers will have the option to switch to the old tax regime. This means that by default, taxpayers will be filing under the provisions of the new regime. A taxpayer would have to explicitly opt for the old one.
The slabs of the new tax regime have also been revamped. The basic exemption limit has been revised upwards from ₹2.5 lakh to ₹3 lakh.
Here's how it stands. The table below compares the new tax regime from next financial year, what taxpayers can opt for now and the old tax regime.
An Exemption VS A Rebate
An exemption and rebate may translate into similar results, but they differ in concept.
An exemption applies to a particular source of income (like agriculture) or below a certain threshold (like 2.5 lakhs) on which no tax is applicable, explains ClearTax. It is a tax-free component.
But a rebate is supposed to be claimed from the tax payable. Therefore, if the government is offering a rebate under the new tax regime under the recently rejigged new regime for those having taxable income of ₹7 lakh, it means that a taxpayer cannot claim the rebate if their income crosses this threshold.
For instance, as noted above, the finance minister said that those earning ₹9 lakhs would pay ₹45,000 in taxes. The calculation behind that is as below according to the tax rates just unveiled by her today.
- Upto ₹3 lakhs, no tax applies.
- For the next ₹3 lakhs (₹3 lakhs to 6 lakhs in taxable income) - 5% of ₹3 lakhs or ₹15,000
- For the next ₹3 lakhs (₹6 lakhs to ₹9 lakhs in taxable income) - 10% of ₹3 lakhs or ₹30,000
This translates to the tax liability of ₹45,000.
This also shows that a taxpayer earning ₹9 lakhs is not paying tax only on ₹2 lakhs (the difference between what she earns on ₹9 lakhs and ₹7 lakhs below which no tax is payable) as is the common misconception. Rather, she is paying taxes progressively across the entire tax bracket.
This year's Union Budget also included several other announcements in personal income taxation, including a rationalisation of the highest tax rate in the country of 42.74%. This would be rationalised to 25% in the new tax regime. The maximum rate would go down to 39% post this.
She also announced that standard deduction for salaried persons and pensioners would get the benefits of standard deduction in the new tax regime too.
The price tag to the government as a result of these changes would be ₹35,000 crores.
A History Of The New Tax Regime
The new tax regime was announced by Sitharaman in her 2020 budget (for financial year 2021).
The regime eliminated several deductions that taxpayers could avail, but also reduced the rates of tax significantly. This gave taxpayers the flexibility to plan financially: they could claim deductions under the old tax regime but pay a higher rate of tax or give up on exemptions like house rent allowance or leave or travel allowance and pay lower rates of tax.
But both tax regimes allowed those with taxable income under ₹5 lakh to pay no tax as they could claim a rebate.
Though several tax professional expressed that not many of their clients opted for the new tax regime. High net worth individuals with significant deduction have all opted for the old tax regime, according to them.