Ten major Income Tax changes to be effective from 01st April 2023

For those who were struggling to complete their demat nomination by 31sts March 2023, there is some relief as the deadline has now been put off till 30th September 2023. However, there are a number of very important changes that are going to be effective from 01st April 2023, as far as the tax changes are concerned. Here is a quick look at how the tax situation is going to be different for individuals from the start of the new fiscal year i.e., April 2023 onwards.

1. The default regime will now be the New Tax Regime (NTR)

For the last few years, the government has tried to passively help people shift to the new tax regime (NTR). However, the penetration was just about 7% and that had to be improved. The Union Budget 2023-24 announced on 01st February 2023, has announced a decisive and positive shift to the new tax regime. What does that mean? It means that starting, 01st April 2023, the default tax regime for every tax payer will be the NTR. This is unlike the current situation when the NTR had to be opted for. In case, the person wants to claim deductions, then the old tax regime will have to be opted for.

2. NTR will still offer some concessions for pensions and salaries

There is some good news and a boost to the new tax regime in the form of extension of exemptions. For example, the salaried individuals and the pensioners will be allowed to claim Rs52,500 (Rs50,000 standard deduction and Rs2,500 professional tax) as exemption even in the new tax regime. Prior to the latest budget announcement, the benefit of standard deduction was not available in the NTR. This will make the NTR more attractive for individual tax payers. However, most of the other exemptions and deductions, like house rent allowance (HRA), interest on home loan, investments made under Section 80C, 80D and 80CCD would still be outside the purview of the new tax regime. Standard deduction will be the sole exception.

3. Higher exemption limits under NTR from April 2023

One of the big benefits of the new tax regime, effective from April 2023, will be the higher tax free limit at Rs7 lakhs. In the old system, income up to Rs5 lakhs tax free through the rebate system. However, under the new tax regime (NTR), that exemption limit has been raised from Rs5 lakhs to Rs7 lakhs. In short, any person whose income under the new tax regime (NTR) is less than or equal to Rs7 lakhs, need not invest anything to claim anny sort of exemption as the entire income would be tax-free irrespective of the quantum of investment made in such cases. It is just higher exemption limits effectively.

4. Standard deduction limits rationalized

To be fair, there is no change in standard deduction limits and that continues to remain at Rs50,000 per annum. However, in the past, the NTR did not have any standard deduction benefit if the NTR was opted for. Under the new regime effective from April 2023, the benefit of Rs50,000 standard deduction will be allowed for salaried employees and for pensioners opting for new tax regime. This was the biggest mind block when it can to accepting the new tax regime and that has been addressed. That also means, that unless you make a choice, your default choice will be the new tax regime (NTR).

5. More attractive income tax slabs for tax payers from April 2023

The new tax rates for different slabs are as under:

• For taxable income up to Rs3 lakh – Tax Rate is Nil

• For taxable income between Rs3 lakh and Rs6 lakh – Tax Rate is 5%

• For taxable income between Rs6 lakh and Rs9 lakh – Tax Rate is 10%

• For taxable income between Rs9 lakh and Rs12 lakh – Tax Rate is 15%

• For taxable income between Rs12 lakh and Rs15 lakh – Tax Rate is 20%

• For taxable income above Rs15 lakhs – Tax rate will be 30%

6. Rationalization of Leave encashment (LE) for non-government workers

One of the objections had been that the leave encashment levels were out of sync with the times at the time of retirement. That is set to change from April 2023. Effective from April 2023, the leave encashment for non-government employees will be exempt up to Rs25 lakhs as against the current exemption limit of just Rs3 lakhs. In short the exemption has been raised by more than 8 times, after remaining static since the year 2002.

7. Withdrawal of LTCG benefits on debt funds and MLDs

This is a new change that became evident in the Finance Bill that was passed in parliament in the previous week approving the Budget. Effective from April 2023, investments in debt mutual funds will be taxed as short-term capital gains, even if they are held for more than 3 years subject to the equity exposure being less than 35%. This could boost bank deposit flows. Also, in the case of Market Linked Debentures (MLDs), it will be treated as short term capital assets and taxed accordingly. In short, all pure debt or near debt instruments are being put at par with bonds and ban FDs for taxation purposes.

8. Some restrictions on life insurance policies kick in

The new fiscal year will also take the step to bring life insurance outside the ambit of EEE (exempt, exempt, exempt). That means, life insurance will be taxed on the life insurance proceeds beyond a threshold. In this case, the proceeds from life insurance premium over the annual premium of Rs5 lakh would be taxable from 01st April 2023. However, this would not apply to the unit linked insurance plans (ULIPs). This would also not apply to death benefits in life insurance.

9. Small relief for senior citizens from April 2023

Currently, the investments by senior citizens in select deposit schemes outer limits. Effective April 2023, some of these limits will stand enhanced. For instance, the maximum deposit limit for senior citizen savings scheme (SCSS) will stand enhanced from Rs15 lakhs to Rs30 lakhs. Also, the maximum deposit limit for monthly income scheme (POMIS) will be raised From Rs4.50 lakhs to Rs9 lakhs for single accounts and from Rs7.5 lakhs to Rs15 lakhs for joint accounts.

10. Physical gold can be converted to EGR without tax implications

Effective April 2023, there will be no capital gains tax implication if physical gold is converted to Electronic Gold Receipt (EGR) or the other way round.