Here's How Salaried Taxpayers Can Benefit from The Union Budget 2023-24

While a budget is intended to look at the overall growth of the country, several aspects of the budget have a direct impact on an individual's finances as well. The budget plays an important role in the lives of the salaried class community in India; changes on the revenue or expense side of the budget have a direct influence on their daily lives.

The current economic condition of rising interest rates to resist high inflation has resulted in a spike in repo rates, which has greatly impacted borrowers with increased EMIs. Salaried taxpayers were feeling the pinch of a cash flow crisis and expected the Union Budget 2023-24 to bring relief and improve their financial situation in 2023.

Individual taxpayers, especially salaried taxpayers, are one of the largest sources of income tax revenues for the government. Given that the Union Budget 2023-24 is the last full budget under the present Modi Government, salaried taxpayers had great expectations. Taxpayers were eager to see how the Government balances expectations and meets fiscal deficit targets.

Since there is the possibility of a tax deduction at source from the earnings of salaried taxpayers, the expectation from the budget always emphasised for tax-saving opportunities on one hand and benefits in lieu of tax payments on the other.

India is on a growth trajectory and needs all possible resources to fuel this growth. Hence the Union Budget 2023-24 balances between avenues to increase tax collection and promote avenues to gather low-cost funds from the taxable community for medium to long-term periods against which tax benefits may be offered. This year, the Union Budget 2023-24 announcements focused on pro-growth measures and inclusive development. Finance Minister Ms Nirmala Sitharaman's Budget Speech 2023-24 includes several proposals for the benefit of taxpayers in the lowest and highest tax brackets.

Here's the following budget proposals for the benefit of salaried taxpayers:

1. Increase in basic tax exemption limit under New Tax Regime

The Government, in a bid to make the New Tax Regime more effective for taxpayers, increased the basic exemption limit to Rs 3 lacs which was Rs 2.5 lacs earlier. An individual earning an annual income < Rs 3 lacs is exempt from paying tax only under the New Tax Regime, and it is applicable to taxpayers across all age groups, whether salaried or senior citizens etc. In addition, there are changes in income tax rates for individuals opting for the new tax regime, and the number of tax slabs has been reduced to 5 from 6.

Do note that this revision of income tax slabs and tax rates is only under the New Tax Regime, and the slabs and rates under Old Tax Regime remain unchanged.

2. Salaried individuals earning annual income up to Rs 7 lacs will have to pay no tax under New Tax Regime

Currently, salaried individuals with a total annual income of less than Rs 5 lacs can claim for a rebate under Section 87A on the taxable income amount. Those with income of up to 5 lacs do not pay any income tax, and a maximum rebate of up to Rs 12,500 under Section 87A of the Income-Tax Act is allowed.

As per the budget proposal, Under Section 87A, there is an increase in the rebate and the threshold of total income from the current Rs 5 lacs to Rs 7 lacs under the New Tax Regime.

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Now you must be confused that as per the revised tax slabs and rates under the New Tax Regime, a salaried individual with a total income between Rs 3 lacs to 6 lacs is liable for tax at 5%, and those between Rs 6 lacs to 9 lacs are liable for tax at 10%. How is it possible that an individual earning up to 7 lacs has to pay no tax?

Section 87A of the Income Tax Act offers a rebate on the taxable income amount of salaried individuals eligible for a rebate as per the given conditions. This reduces your taxable amount, making it almost Nil; thus, those earning up to Rs 7 lacs will pay no tax.

Well, let us explain to you with an example:

As you can see, the Old Regime allows a rebate on a total income of Rs 5 lacs with a maximum limit of Rs 12,500. Whereas, as per the New Regime, a salaried individual with a total taxable income of Rs 8 lacs will be eligible for exemption up to Rs 3 lacs, and tax at a rate of 5% will be charged on the balance of Rs 4 lacs. The rebate limit u/s 87A has been hiked to Rs 25,000 from Rs 12,500 for taxable income up to Rs 7 lacs.

According to the Income-Tax Act, the rebate under Section 87A is available only to resident individuals. Taxpayers such as non-resident individuals (NRIs), Hindu Undivided Family (HUF) and firms are not eligible for the rebate under Section 87A. The tax rebate is available under both the tax regimes - Old as well as New Tax Regimes. For FY 2022-23, the amount of tax rebate available under both tax regimes would be the same. However, the amount of tax rebates available under the New Tax Regime for FY 2023-24 has been increased.

3. Rise in the standard deduction under the New Tax Regime for the salaried class and the pensioners, including family pensioners

Finance Minister Ms Nirmala Sitharaman, while presenting the Union Budget on February 01, 2023, announced an increase in the 'standard deduction' to Rs 52,500 a year from the current Rs 50,000.

In addition to the basic exemption limit, there is a standard deduction applicable to a salaried taxpayer to provide relief; it is the amount that is not subject to tax. As per the Union Budget 2023-24, each salaried person with an income of Rs 15.5 lacs or more would thus stand to benefit by an additional Rs 2,500 in terms of tax savings. It will be overall beneficial for the employee without putting any extra burden on the employers

4. Tax exemption limit on leave encashment on the retirement of non-government salaried employees has been hiked

Several companies allow their employees to carry forward their leaves accrued which can be encashed at the time of retirement or resignation. The amount received by using this facility is subject to the Leave Encashment, which is taxable as 'Income from Salary'. However, certain exemptions are applicable to this income.

Finance Minister Ms Nirmala Sitharaman said, "The limit of Rs 3 lacs for tax exemption for such employees was last fixed in 2002 during the Atal Bihari Vajpayee government when the highest basic pay in the Government was Rs 30,000 per month. In line with the increase in government salaries, I am proposing to increase this limit to Rs 25 lacs."

Apart from the above-mentioned changes, the Union Budget 2023-24 also committed to introducing a new-gen common income-tax return for the taxpayers, deploying additional officials for the disposal of small appeals and strengthening the grievance redressal mechanism for taxpayers.

To conclude...

Salaried taxpayers have seen a sharp jump in expenses from household to medical and more due to rising inflation. Considering the high inflation, economic uncertainties and the hint of global recessionary risk, salaried individual's demanded a slew of relief measures from this year's budget. Despite the fact that all expectations were not met, Budget 2023-24 gave significant tax benefits to salaried taxpayers through the implementation of necessary measures. A higher disposable income will ensure that the Indian salaried class, a major source of tax revenue, may continue to improve their standard of living and revive the Indian economy.

The Union Budget 2023-24 appears to attract and reinforce the sentiments of salaried taxpayers by providing several tax benefits and encouraging them to choose the New Tax Regime. However, it is important to note that these benefits are only accessible to individuals who submit their tax returns under the New Tax Regime. Remember that, as stated in the Budget 2023-24 speech, the new regime will be the default tax regime unless the taxpayer opts to be governed by the Old Regime. The old one, however, has not been discontinued, and taxpayers can continue to use it either.

You see, the Old Tax Regime offers various exemptions and deductions under numerous sections for tax-saving purposes. On the other hand, the New Regime offers reduced tax rates and greater flexibility and endeavours to simplify the tax filing process. One may need to determine the more beneficial regime on a case-to-case basis. Your decision to select the best suitable tax regime should be based on a number of variables, including your current income level, income structure, exemptions and deductions available to you, and so on.

[Read: Old or New Tax Regime - Which is Beneficial for You Post the Union Budget 2023-24 Announcements]

MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.