Budget 2023-24 and personal finance

3 Feb 2023 , 09:25 AM

Investors expected that the government would go for an all-out budget to please the middle class, coming in a year of state elections and just a year ahead of the central elections. However, while giving the tax payers a lot to cheer about, the budget has also held its own against the temptation of too much extravagance. Let us look at some of the key announcements in the budget with larger personal finance implications.

Making life easier for the middle class

Even ahead of the Union Budget announcement, Nirmala Sitharaman had already underlined the need to take care of the middle class. This was the segment hit most by rampant inflation and recession fears, leading to loss of purchasing power. Here is what the government announced. The rebate system was not changed but the base tax free income was effectively increased from Rs5 lakhs to Rs7 lakhs. 

The tax exempt limit was only raised from Rs2.50 lakhs to Rs3.00 lakhs, so anyone earning above Rs3 lakhs still needs to file income tax returns. However, the rebate would be tweaked in such a way as to make income up to Rs7 lakhs free of tax. This would be in the new tax regime only. While expressing her intent to make the new tax regime the default tax regime in future, the Union Budget has also given salaried and the pensioners added benefit of Rs50,000 as standard deduction, so they pay zero tax up to Rs7.50 lakhs income. 

Tweaking and simplifying tax rates in new system

In a bid to promote the new tax system, the government has made the new tax system more attractive and simpler than old system, so that the loss of exemptions do not pinch. This is likely to result in more people opting for the rather simple New Tax Regime. Here are the rates applicable from FY2023-24 onwards in New Tax Regime.

Tax Slab	Tax Rate (New Tax Regime till FY2022-23)	Tax Slab	Tax Rate (New Tax Regime from FY2023-24)
Up to Rs2.50 lakh	Nil	Up to Rs3.00 lakh	Nil
Rs2.5 lakh – Rs5.0 lakh	5%	Rs3.0 lakh – Rs6.0 lakh	5%
Rs5.0 lakh – Rs7.5 lakh	10%	Rs6.0 lakh – Rs9.0 lakh	10%
Rs7.5 lakh – Rs10.0 lakh	15%	Rs9.0 lakh – Rs12.0 lakh	15%
Rs10.0 lakh – Rs12.5 lakh	20%	Rs12.0 lakh – Rs15.0 lakh	20%
Rs12.5 lakh – Rs15 lakh	25%	Above Rs15 lakh	30%
Above Rs15 lakh	30%

In the new regime, not only has the base exemption limit been raised, but even the slabs have been reduced and the structure simplified. If you add the additional standard deduction benefit, it is an added incentive to shift to the new system. As per the FM, a middle income person earning Rs15.50 lakhs, would gain an additional tax benefit of Rs52,500 per fiscal year by opting for the new tax regime.

Hitting the high income groups a little less

Ahead of the Union Budget, there were remonstrations that the peak rate in India for the higher income groups was too steep. For instance, a person earning more than Rs2 crore per year was paying 42.74% tax, which was just too high by global standards. Even in Asia, the peak rate was not more than 30% in most cases. To rationalize this comparison, the Union budget 2023-24 has cut the peak surcharge levied on higher income groups from 37% to 25%. Thus, the peak rate of effective tax would come down from 42.74% to 39%. This would be instrumental in boosting the spending power for higher end products and also ensure that more of surplus funds are made available for equity, REIT and higher risk investing.

Widening the choice of government investment schemes

Government sponsored small savings and other schemes have always been a hit with investors in India due to their high tax effective returns as well as the assurance of government backing, which makes them free of default risk. There are two such additions to the investment palate. Firstly, the government has introduced “Mahila Samman Saving Certificate”, a one-time small saving scheme for women. This will entail a deposit of up to Rs2 lakhs for a 2-year period and such deposits can be made till March 2025. These deposits will earn an assured fixed rate of interest of 7.5% with partial withdrawal option.

In addition, the finance minister has also enhanced the maximum deposit limit under the existing Senior Citizen Saving Scheme (SCSS) from the current Rs15 lakh to Rs30 lakh. At the same time, in the interest of rationality, the government has also raised the maximum deposit limit for the Monthly Income Plan (POMIS) from Rs4.50 lakh to Rs9.00 lakh for individual accounts. In the case of joint accounts, such limit will stand enhanced from Rs9 lakh to Rs15 lakh.

Making the presumptive tax scheme more meaningful

In the last few years, several professionals, MSMEs and small individual proprietorship businesses and partnerships have derived the benefit of the presumptive tax scheme. However, the limits had not been raised for some time for the Section 44AB scheme. Now, for small enterprises with a turnover of up to Rs2 crore the limit has been enhanced to Rs3 crore to be eligible for presumptive tax. Similarly, the limit for professionals to avail the presumptive scheme, the limit has been raised from Rs50 lakhs to Rs75 lakhs. Under the presumptive scheme, the entrepreneur or professional does not have to maintain books of accounts and get audits done, if the turnover is below the above limits. However, the condition is that the notional profit cannot be less than 6% of total turnover, subject to 95% of the receipts through banking channels and subject to zero exemptions availed.

Additional benefits offered to individual taxpayers

The budget, as promised, has taken steps to make life easier for the hard working Indian common man. To reduce the burden of TDS, the tax portion of EPF withdrawals in non-PAN cases has been reduced from 30% to 20%. In addition, for non-government salaried employees, the tax-exempt limit for leave encashment on retirement has been hiked from Rs3 lakh to Rs25 lakh. All these are likely to come as a relief for the common man.

Limits imposed on high value proceeds

The government has sought to reduce the tax benefits claimed in the case of insurance and capital gains for high income persons. As per the new budget, income from insurance policies having premium above Rs5 lakh in a year would be taxed from April 2023. However, the income would continue to be exempt if received upon the death of the insured person. In addition, the budget has also stipulated that any deduction from capital gains on investment in residential house under Section 54 and 54F (reinvestment of eligible capital gains in house property) will be capped at Rs10 crore. This will largely deter the mega claims made by high net worth assessees buying luxury real estate projects in metros to save tax.

One can complain that the government did nothing much about raising exemption limits of Section 80C or Section 80D and Section 24. Also, capital gains and STT was left untouched. However, amidst the budgetary constraints and capex commitments, the budget has done a good job for making life easier for the common man.