Income Tax Scenario After Union 2023 Budget: Know The Best Plan For You

On Wednesday, Nirmala Sitharaman, the Finance Minister, announced Budget 2023 and made alterations to the current income tax system. Thus, anyone with an annual salary of up to Rs 7.5 lakh can be exempt from paying taxes. Nevertheless, what of those who have made considerable investments in tax-saving instruments?

After the Union Budget 2023 has been presented, it is simpler to choose between the new and the existing income tax system. It is certain that a person with an income of up to Rs 7.5 lakh per annum will not have to pay any tax in the fresh income tax system. But how does this affect those who have heavily invested in tax-saving instruments?

At present, those with a yearly income of up to Rs 5 lakh are exempt from income tax in both the old and new taxation systems. Finance Minister Nirmala Sitharaman declared on Wednesday while presenting the Union Budget 2023 that she proposes to raise the rebate cap to Rs 7 lakh in the new taxation regime. Therefore, individuals in the new tax arrangement with an income up to Rs 7 lakh would not need to pay any tax. The standard deduction of Rs 50,000 is now available to those in the new taxation system, meaning that those with an income up to Rs 7.5 lakh are not liable for paying any tax. Previously, the standard deduction was only applicable to those who opted for the traditional tax system.

Nirmala Sitharaman has lowered the tax brackets in the new income tax system and made it the “default regime”. Taxpayers will have to choose the previous tax system if they want. In the new system, those making Rs 9 lakh annually will be taxed at 5%, meaning their tax expenditure will be Rs 45,000.

People earning up to Rs 15 lakh annually will be charged 10 percent in tax, resulting in a payment of Rs 1.5 lakh, which is 20 percent less than the Rs 1.87 lakh previously. As such, for those not taking advantage of tax-saving investments, switching to the new system appears to be a smart decision. Nevertheless, experts suggest that those who have substantially invested in tax-saving instruments may be better off with the old tax regime. Under Section 24b, taxpayers can cut Rs 2 lakh in interest on a home loan, and if the house is considered ‘affordable’ this deduction can reach Rs 2.5 lakh under Section 80EE. Additionally, Section 80C offers the traditional tax-saving option.

By making use of available deductions, an individual can save up to Rs 3.74 lakh in taxes. This includes a deduction of Rs 1.5 lakh against investments in mutual funds and equity-linked saving schemes, plus Rs 50,000 in health insurance under 80D and Rs 50,000 from the National Pension Scheme under 80CCD. Moreover, there is a standard deduction of Rs 50,000. For an annual income of Rs 15 lakh, the maximum amount one can save on taxes in the new tax regime is Rs 1.12 lakh. In comparison, the tax liability for the same income in the old regime is Rs 2.62 lakh. If investments in tax-saving instruments amount to Rs 3.74 lakh, the tax outgo in both regimes should be the same. Therefore, those who have invested heavily in tax-saving instruments may consider giving the new pension scheme a second look.