Income Tax Deductions

The Union Minister of Finance declared in his Union Budget 2023 speech on 1st February, to increase the standard income tax deductions of up to Rs. 52,500 from Rs. 50,000 for individuals earning Rs. 15.5 lakhs and above annually.

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One of the major changes announced in the Budget 2023 is under the income tax slabs in the new tax regime. An individual will have to pay “Zero” tax up to Rs. 7 lakh in the new tax regime. For example, an individual with annual income of Rs. 9 lakh will have to pay only Rs. 45,000 as tax in the new regime. This is only 5% of a taxpayer's income in the new regime. There is a standard deduction of Rs 52,500 in the new tax regime.

Income Tax Slab Rates

Tax Slabs Old Tax Regime New Tax Regime
0-3 lakh NIL NIL
3-6 lakh 5% NIL
(Income limit for rebate of income tax increased from Rs. 5 lakh to Rs. 7 Lakh)
6-9 lakh 10% 10%
9-12 lakh 15% 15%
12-15 lakh 20% 20%
Above 15 lakh 30% 30%

New Tax Regime Eligibility for Salaried Person

For pensioners, the finance minister announced extending the benefit of standard deduction to new tax regime. Each salaried person with an income of Rs. 15.5 lakh or more will benefit by Rs. 52,500. Sitharaman, while presenting the Union Budget in Parliament, said, "A person earning Rs 9 lakh a year will now be paying just Rs 45,000 instead of Rs. 60,000 currently. Similarly, a person earning Rs 15 lakh will now pay only 10 per cent of this as tax."

 

Leave Encashment on Retirement

Finance minister has proposed to hike tax exemption on leave encashment on retirement of non-government salaried employees to Rs 25 lakh from Rs 3 lakh. "We are also making the new income tax regime the default tax regime however, citizens will continue to have the option to avail the benefits of the old tax regime," FM said.

Important Highlights of Union Budget 2023:

  • Government proposes to cap deductions from capital gains on investments in residential houses to Rs. 10 crore.
  • An individual with annual income of Rs. 9 lakh will have to pay only Rs. 45,000 in taxes.
  • Income of Rs. 15 lakh will fetch Rs. 1.5 lakh tax, down from Rs. 1.87 lakh.
  • Rs. 50,000 standard deduction to taxpayers.
  • Tax exemption on leave encashment on retirement of non-government salaried employees hiked to Rs 25 lakh from Rs 3 lakh.

Contribution by Employer Towards Employees NPS/EPF Account

For the FY 2023-2024, the employer's contributions towards superannuation, EPF, and NPS are available for tax exemption up to a maximum limit of Rs. 7.5 lakh.

Employees are not taxed on the employer's contribution to their EPF account as long as it does not exceed 12% of their gross salary (basic plus DA). Employer contributions that go beyond the threshold will also be taxed. Employees may also claim a deduction under the new tax regime, under Section 80C, for their portion of EPF contributions, up to a total of Rs 1.5 lakh.

With Section 80C reduction of Rs. 1.5 lakh and Section 80CCD (1b) reduction of Rs. 50,000, the maximum tax deduction requested in employer additions to NPS accounts is 10% of the pay (Basic + DA).

Interest on Employee's Provident Fund

If an employee contributes more than Rs 2.5 lakh to an EPF account within a fiscal year, interest on those contributions is taxable (including TDS) to the employee.

In the new tax structure, if the interest earned during a year on the EPF scheme does not exceed the limit of 8.10%, you can avail of tax exemption benefits.

Gratuity

All the taxpayers that receive gratuity (on working for more than 5 years) from their employer can avail of deduction under the new tax regime up to a specified limit. The deduction under the new tax regime for gratuity in a lifetime is kept at Rs. 20 lakhs for non-government employees. There is no limit for government employees.

In the new tax regime, the gratuity amount received on an employee's death shall be available for tax exemption with no limits.

Interest Earned on Post Office Savings Account Balances

Interest received from savings bank accounts up to Rs 10,000 is not taxable under section 80TTA of the Income Tax Act. If the total interest generated from all of these sources exceeds Rs 10,000, the excess amount is tax deductible.

However, only post office savings account holders can still avail of exemption up to a certain extent. If you are availing of this exemption, you can derive your gross taxable income by deducting the interest earned under the head of other sources.

Life Insurance Maturity Amount

In the new tax regime exemption list, a taxpayer cannot avail of a tax deduction on the life insurance premium. However, the maturity amount that a taxpayer receives from a life insurance company is exempted u/s section 10(10D) in the new tax regime.

PPF & Sukanya Samriddhi Account Interest and Maturity Amount

Under the new tax regime exemption list, PPF contributions are not eligible for tax deductions u/s 80C. The interest earned and the maturity amount of the PPF Account and Sukanya Samridhi Yojana will be eligible for tax exemption under the new tax regime.

Payment Received from National Pension Scheme

Even in the new tax regime exemption list, the lump sum maturity amount received from the National Pension Scheme will be eligible for tax exemption.

In the new tax regime exemption list, a maximum of 60% of the NPS corpus can be withdrawn and is tax-free on Tier- I NPS account on maturity. Also, any partial withdrawals remain exempted from tax.

And as per the current Income tax regime, an individual can avail of tax exemption benefits upon withdrawal of a maximum of 25 % of his own NPS contribution amount. For own contributions, an individual can avail of tax benefits up to Rs. 1.5 lakh u/s 80CCD (1) and Rs. 50,000 u/s 80CCD (1B).

The new tax regime exemption list does not offer tax benefits on the employee's own contribution, but if it is an employer's contribution to the employee's account, it is eligible for deduction u/s 80CCD (2). Furthermore, partial withdrawals up to a limit and the payment received from the National

Pension Scheme at the time of closure is exempted from tax in the new tax regime.

Voluntary Retirement Scheme Amount

As per the new tax regime, if a taxpayer opts for voluntary retirement, then his monetary benefits are eligible for tax exemption. The maximum limit is up to Rs 5 lakh in both the current and the new tax structure.

FAQ's

  • Q: Is standard deduction applicable in the new tax regime?

    Ans: Substantial deductions and exemptions aren't permitted under the new tax regime. However, taxpayers do have the option of paying concessional tax rates. The standard deduction from gross salary is also not permitted if the taxpayer is required to file a return under the new tax system.
  • Q: What are the benefits of the new tax regime?

    Ans: The benefits of the new tax regime include lower tax rates, easier compliance, and easier filing since fewer documents are needed since most of the exemptions and deductions are unavailable.
  • Q: What are some deductions under the new tax regime?

    Ans: Minor child income allowance, HRA, LTA, etc., are some deductions under the new tax regime.
  • Q: Can someone opt for New Tax Regime and avail of Rebate u/s 87A?

    Ans: Since the deduction under the new tax regime doesn't mention anything thus, the rebate listed in section 87A applies to both the old and the new tax regimes.
  • Q: How can someone opt for the new tax regime?

    Ans: To opt for the new tax regime, one has to choose it while filing for tax returns.
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