Budget Prep: Understanding Tax Rates, Surcharges, and Rebates Before Sitharaman Speaks

30 Jan 2024 , 10:50 AM

Amidst much anticipation, millions of taxpayers across await Finance Minister Nirmala Sitharaman’s presentation of the final (interim) Budget prior to the general elections of 2024 on February 1. The reduction of tax rates, introduction of tax exemptions, and reduction of TDS (tax deducted on source) on virtual digital assets (VDA) are among the expectations of taxpayers. 

It is essential to first define some basic phrases so that the average taxpayer may grasp them before outlining further expectations.

10 essential terms to comprehend:

1. Tax offset It refers to the amount that is subtracted from taxable income in order to reduce your tax liability, as the phrase implies. For example, taxpayers can deduct ₹ 50,000 as a standard deduction. This implies that to determine taxable income, total income is subtracted by ₹ 50,000.

Similarly, if you invest in tax-saving FDs, PPFs, or NSCs, you can deduct up to ₹ 1,50,000 from your taxes (section 80C).

2. Rebate: A rebate is an overall income tax reduction. Taxpayers can lower their tax component by the amount of the refund, just as they can lower their taxable income through a deduction. It is typically provided to reduce taxpayers ‘ tax burdens in order to boost economic activity.

3. Tax surcharge: A tax surcharge is imposed on individuals whose income exceeds ₹ 50 lakh. It only affects the amount of tax due, not the overall income. The tax rate of thirty % is subject to a ten % surcharge, making the overall tax obligation thirty-three %.

4. Tax cess: This type of tax, which is levied on income tax, is meant to generate money for certain uses like healthcare and education. The cess rate, which is now 4 %, is applied at this uniform rate to all income slabs. On tax liability, including surcharge, a cess is assessed. 

This won’t be stopped until the government has amassed sufficient funds to accomplish its goals.

5. New tax system: This is the newest tax system, with seven tax slabs that give concessional tax rates. It was implemented in 2022. If an individual’s income exceeds ₹ 15 lakh, they are subject to the highest tax rate of 30 %, which eliminates the majority of tax deductions. 

The new tax system took effect in the 2023–2024 fiscal year as the default tax system. 

6. Old tax system: There were four tax slabs under this old tax system, with the highest tax rate of 30% being applied to incomes over ₹ 10 lakh. All tax deductions that are no longer available under the previous tax regime are still available under this one.

7. TDS (tax deducted at source): This method involves deducting taxes at the source of income, such as when banks transfer interest money or when businesses transfer dividend income. 

8. Tax-saving tools: These include PPF, NSC, and NPS, among other savings tools that allow taxpayers to deduct certain amounts from their income taxes. It is important to keep in mind that under the new tax law, a number of these deductions are no longer allowed. 

9. Tax collection at source (TCS): TCS is the extra money that a seller collects from the buyer at the time of sale as tax on top of the sale amount and deposits with the relevant tax authority.

For example, unless there are extenuating circumstances, a TCS of 20 % is required of persons who wish to remit more exceeding ₹ 7 lakh in a financial year. 

10. Virtual digital assets (VDAs): These are digital assets that are subject to the tax laws that were implemented in 2022. The tax laws include a 1% TDS on purchases and sales and a thirty % TDS on capital gains. Digital currencies like dogecoin, ethereum, bitcoin, and others are included in VDAs.

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