digigiggles Income tax clarification following Budget 2023

Income tax clarification following Budget 2023: Which plan suits you best?

2 February 2023

It gets simpler to choose between the old and new income tax regimes as the dust settles a day following the release of the Union Budget 2023. A person with an annual income of up to Rs 7.5 lakh can avoid paying any tax under the new income tax plan, that much is certain. What about individuals who have made significant investments in tax-saving strategies?

“Both the old and new tax systems currently exempt persons with income up to Rs 5 lakh from paying any income tax. In the new tax system, I suggest raising the rebate cap to Rs 7 lakh. Therefore, under the new tax system, individuals with income up to Rs. 7 lakh will not be required to pay any tax “While delivering the Union Budget for 2023 on Wednesday, Finance Minister Nirmala Sitharaman stated. People who earn up to Rs 7.5 lakh annually are not required to pay taxes owing to the standard deduction of Rs 50,000 that is now available under the new income tax system. Previously, only those who chose the previous income tax system were eligible for the standard deduction.

Additionally, Sitharaman made the new income tax system the “default regime” and decreased the number of tax brackets. Now, taxpayers must choose the previous tax system. In the new income tax system, those making Rs 9 lakh annually will pay Rs 45,000 in taxes and be subject to a 5% tax rate. The amount of tax paid will be 25% less than the Rs 60,000 previously paid. A 10% tax will be applied to incomes up to Rs 15 lakh per year, resulting in a final payment of Rs 1.5 lakh. In actuality, this represents a 20% reduction from the previous tax liability of Rs 1.87 lakh. Therefore, switching to the new system is thought to be a wise decision for people who are not relying on tax-saving investments.

However, the prevailing opinion of experts is that choosing the old income tax system may still make sense if a person has heavily invested in tax-saving equipment. Under Section 24b, a taxpayer can save Rs 2 lakh on house loan interest. In Section 80EE, if the home falls under the “affordable” category, the deduction increases to Rs 2.5 lakh. Next is our trusted friend 80C. A 1.5 lakh rupee deduction is available for investments made in equity-linked savings plans and mutual funds, among other things. Under section 80D, a person can save 50,000 rupees on health insurance. By investing in the National Pension Scheme, you can also avoid paying taxes on Rs 50,000. This savings is below 80CCD. Additionally, there is a standard deduction of Rs. 50,000. Using all the tax-saving tools, one person can save up to Rs 3.74.

With the new tax system, an individual can only save a maximum of Rs. 1.12 lakh in taxes on an annual income of Rs. 15 lakh. With the former system, this person’s tax obligation would have been Rs. 2.62 lakh; in the current system, it is Rs. 1.5 lakh. The amount of tax paid under both systems is expected to be the same if a person is able to invest Rs 3.74 lakh and utilize tax-saving gadgets. If a taxpayer has made significant investments in tax-saving strategies, it might not be a bad idea to give the new pension plan some more thinking.

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