-Sparsh Bansal & Ritika Mahajan | February 1, 2023

In an attempt to nudge taxpayers to move to the new tax regime introduced in 2020, the government tweaked tax slabs and rebate limit in the budget presented on February 1.

The rebate limit which was Rs.5 lakh for both the old and new tax regimes has been increased to Rs. 7 lakh in the new regime. The number of tax slabs has been reduced to five and the tax exemption limit has been raised to Rs.3 lakh from Rs. 2.5 lakh by the Finance Minister Nirmala Sitharaman, in the budget to promote the new tax regime among taxpayers. Last year, Former Revenue Secretary, Tarun Bajaj in an interview with The Economic Times said that the government’s new tax regime has received a lukewarm response from taxpayers, with not many opting for it.

 The Finance Minister announced that the new tax regime would be the default regime, indicating the government’s intention to completely switch to the new structure. Currently, people have the option to file income tax under the old tax regime.

Experts say that despite the new changes, many people would still not opt for the new regime. “People greatly benefit from the house rent allowance and leave travel allowance in the old tax regime which will hold them from moving to the new one,” said Samir Kanabar, tax partner at Ernst and Young.

If taxpayers file returns under the new tax regime they would not be able to avail exemptions and deductions under Section 80C of the Income Tax Act through tax-saving instruments like insurance, Public Provident Fund, and ULIPs. This would hit the insurance industry as many people invest in these instruments only to make use of the exemptions, said Vaibhav Gupta, tax partner at Dhruva Advisors. “The changes will hurt the insurance, non-banking financial companies, and real estate industry,” said Gupta.

“Seems like the future is for the new tax regime for the individuals. Disappointing as it will discourage investments by individuals,” said Amit Maheshwari, tax partner at AKM Global.

Household savings were 22.2% of the Gross Domestic Product in 2020-21, a five percentage points increase from 2016-17, according to the economic survey 2022-23. This shows that Indian households are saving more and the government’s new tax regime is intended to spur consumption.

In addition to changes made to the new tax regime, the government has also increased the upper limit of the Senior Citizens Savings Scheme to Rs.30 lakh from Rs. 15 lakh earlier. This will bring relief for them, said Sandeep Sehgal, partner at AKM Global. The budget proposed reducing the highest surcharge to 25 per cent from 37 per cent.