Budget 23-24 implications on Personal Income Tax

On the 1st of February, 2023, Ms N. Sitharaman, the finance minister of India, delivered the last full budget before the term of the current govt. ends and general elections occur, expectedly, in May 2024. There were many expectations out of the budget from various groups of people and institutions, some have been met, some exceeded, while some have fallen short as well.

This post is not for the analysis of the entire budget, but rather of a very particular section, that affects salaried countrymen like myself, the Personal Income Tax.

With the proposal for the new tax regime for 2023-24 (hereafter mentioned as the new regime), discussions have come aplenty as to how much tax would be saved and how it shall spurt the growth of the economy and so on. It is beyond doubt that the disposable income at the hands of the salaried employee will increase, let’s take an example below.

For an employee, earning a gross income of ₹12,00,000, the income tax, as per the new regime comes to be ₹85800. For the same employee, under the old tax regime, considering the standard deduction of ₹50000, professional tax of ₹2400 and assuming HRA exemption of 15% of gross, the taxable amount becomes ₹967600, which attracts a tax of ₹110261. A difference of ₹24461, is definitely not a small amount. One must note that here we are considering that there are no tax-saving investments made. No 80C, no 80D, nothing.
We can summarize that by following the old regime, the employee would have a monthly income of ₹71445, whereas the new regime would provide ₹92850, a clear ₹21000+ difference. At a glance, this is quite amazing. Higher disposable income will invariably translate into higher consumption, which in turn will lead to better economic scenarios.

On the flip side, we must note that most of the exemptions that the old tax regime offers are tied to a certain security for the future. The sections 80C, 80CCD, etc. are aimed towards savings for the future, in the form of PPF, ELSS schemes, Sukanya Samriddhi schemes or NPS. So, for people who are still not too concerned about future plans, even for the sake of avoiding tax, there are avenues for savings. In the new regime, there is no such obligation. Rather now, one must be careful as to not spend all the money away on luxuries, rather than saving for future security. The fact that just because there are no exemptions anymore, does not mean that the need for insurance schemes shall vanish. Worse still, now one has to buy the schemes, as usual, but not be able to claim any tax rebate, if following the new regime.

Reimagining the above example, but this time, we consider that along with the deductions considered earlier, there is also ₹250000 worth of savings done in the form of 80C, 80CCD (NPS) and 80D schemes. The resultant taxable income becomes ₹717600. Calculating the tax on this, as per the old tax regime, we obtain a payable tax of ₹58261. Calculating further, we obtain a monthly disposable income of ₹59311. While this is about ₹12100 less than the disposable income obtained if no savings are done, savings towards future security is being done.
The point to note is that the new regime shall provide an increase of ₹33500 per month as disposable income. For an entrepreneurial person, it is an outright boon and it opens up growth opportunities.

Concluding the above views, we realize that the new regime will put more money in the hands of the individual, provide greater control and above all, entrust a lot of responsibility. As a follow-up to the budget, there should be more widespread awareness sessions about the various investment schemes, so that the people who opt for the new regime can utilize the money fruitfully.

This move, by Ms Sitharaman, might very well prove to be a turning point in the history of the country where the increase in the involvement of the salaried class in the investment market is remarkable or it may be the beginning of a downward spiral where unnecessary spending takes precedence over future planning leading to eventual misery and woe.

To end, I realise that people who understand their money matters properly, can control their finances well and believe that they can take care of the situation on their own, they must choose the new regime. The ones who are not too sure about their capabilities and would like to play it safe should invest as much as they can and take advantage of the old scheme. Finally, in my opinion, no one should opt for the old scheme if not keen on investing in any of the tax saving instruments currently.

The excel sheet used to make the calculations and come to the results is linked here. Please feel free to use it to compare your own tax liability. I am not a “Tax Expert” but I do fill my own ITR, am sure that counts 😊
The cover image has been sourced from Shutterstock via Google. I do not own any right to the photo.

I will be thrilled to read your thoughts on the report and am sure, I shall learn from your perspectives as well.