Income Tax New Regime Explained

In this article, we’re talking about direct tax provisions of the income tax announced in the Union budget 2023 for the financial year 2023-24. The taxpayers will have to pay tax on the basis of the new tax regime in the upcoming financial year.

Change in Slab Rate (Tax payer opting for new tax regime)

Currently, tax payers opting for the new regime are required to pay tax as per following slab rate for the ongoing financial year 2022-23.

It is proposed to change slab rate as follows for FY 2023-24:

The computation of the individual's or HUF's total income is a requirement for the concessional rate.

a) Without any specified exemption or deduction (like HRA, LTA, clubbing, PT, interest on housing loan, additional depreciation, 80C, 80D, 80G etc )

b) Without set off of any loss

c) By claiming the depreciation, if any, and

d) Without any exemption or deduction for allowances or perquisites, by whatever name called, provided under any other law for the time being in force.

Rationalisation of Surcharge rates

Under the existing provision of Act, higher rate of surcharge under new tax regime is 37% in case total income (other than dividend income, income from capital gain) exceeds Rs.5 crores.

It is proposed to restrict the higher rate of surcharge to 25% if taxpayers opt for a new tax regime.

Rebate under section 87A

Under the existing provisions, an Individual having income till Rs.5 lakh (other than long term capital gain on listed shares) is not required to pay any income-tax.

It is proposed that individual residents opting for the new tax regime shall now be entitled to a rebate of 100% of the amount of income-tax payable on a total income not exceeding Rs.7 lakh.

Let’s understand with the help of example, how change in slab rate and rebate will have impact on tax liability for taxpayers opting for a new tax regime.

New Tax Regime - Before Proposal of Budget 2023

New Tax Regime - After proposal of Budget 2023

Increasing threshold limit for co-operatives to withdraw cash without TDS Under the existing provision of the Act,

• TDS is required to be deducted @ 2% - if the cash withdrawal exceeds 20 lakh but less than 1 crore Rupees. (In case the assessee has not filed the return).
• The tax has to be deducted @ 5% - if the cash withdrawal exceeds 1 crore Rupees (In case the assessee has not filed the return).
• It is proposed to increase the above said limit from 1 Crore to 3 Crore Rupees for co-operative society only.

Also Read: Difference Between TDS And TCS

Increasing rate of TCS of certain remittances

Existing provisions provide for TCS on business of trading in alcohol, liquor, forest produce, scrap, foreign remittance through the Liberalised Remittance Scheme and on sale of overseas tour packages. In order to increase TCS on certain foreign remittances and on sale of overseas tour packages, an amendment is proposed.

The current and proposed TCS rates are tabulated as under :

* In the table above, the present rate and the proposed rate of TCS are based on the amount or the aggregate of the amounts being remitted by the buyer in a financial year.

Special provision for taxation of capital gains in case of Market Linked Debentures

As per the existing provision, Market Linked Debentures are currently being taxed as long term capital gain at the rate of 10% without indexation.

It is proposed to insert a new section, to treat the capital gains arising from the transfer or redemption or maturity of these securities as short-term capital gains at the applicable rates.

Rationalisation of exempt income under life insurance policies

Existing regulations allow for income-tax exemption on payments made in connection with life insurance policies, including any policy bonuses. There is a restriction that the premium for any given year during the policy's terms cannot be greater than 10% of the actual capital total insured.

In addition to that in the Finance Bill 2021, it was provided that sum received under a ULIP (barring the sum received on death of a person), issued on or after the 01.02.2021 shall not be exempt if the amount of premium payable for any of the previous years during the term of such policy exceeds Rs.2,50,000.

After the enactment of the above amendment, ULIPs having premium payable exceeding Rs. 2,50,000/- have been excluded from exemption and all other kinds of life insurance policies are still eligible for exemption irrespective of the amount of premium payable. It is suggested that income from insurance policies (other than ULIPs, for which provisions already exist) with premiums or aggregates of premiums exceeding Rs. 5,00,000 in a year be taxed in order to prevent such misuse.

Thus, combine reading of amendment as per Finance Bill 2021 and proposed in Budget 2023, following points emerge:

Before Finance Act, 2021

ULIPs:

Whole policy amount will be exempt including bonus on such policy, If premium payable does not exceed 10% of the actual capital sum assured for any of the years during the terms of the policy.

Other Insurance Policy:

Whole policy amount will be exempt including bonus on such policy, If premium payable does not exceed 10% of the actual capital sum assured for any of the years during the terms of the policy.

After Finance Act, 2021

ULIPs:

Whole policy amount will be exempt, if following conditions are fulfilled.

• If premium payable does not exceed 10% of the actual capital sum assured for any of the years during the terms of the policy.
• Premium payable for any of the previous years should not exceed Rs. 2,50,000.
  
  Note: For policy issued on or after 01.02.2021.

Other Insurance Policy:

Proposed Finance Act, 2023

ULIPs:

(No change)

Other Insurance Policy:

Whole policy amount will be exempt, if following conditions are fulfilled.

• If premium payable does not exceed 10% of the actual capital sum assured any of the years during the terms of the policy.

• Premium payable for any of the previous years should not exceed Rs.5,00,000.

Note:
- For policy issued on or after 1st April, 2023.
- The sum received on death of a person is exempt in all cases.

A property's interest on borrowed money used for acquisition, renovation, or construction should not be double-deducted.

As per the existing provision, the amount of any interest payable on borrowed capital for acquiring, renewing or reconstructing a property is allowed as a deduction. This same interest also contributes to the cost of acquisition or cost of improvement, which is deductible when calculating capital gains on the transfer of such property. In other instances, the deduction is also being claimed under different Chapter VIA of the Act requirements.

In order to prevent this double deduction, it is proposed that the cost of acquisition or the cost of improvement shall not include the amount of interest claimed under section 24 or Chapter- VIA.

Limiting the roll over benefit claimed under section 54 and section 54F

As per existing provision of section 54 and section 54F, it allows deduction on the Capital gains arising from the transfer of long-term capital asset (House Property and Other than House Property, respectively) if specified amount is invested in new property and other conditions are fulfilled.

The maximum deduction that an assessee may receive under sections 54 and 54F would reportedly be capped at Rs. 10 crore.

Increasing threshold limits for Presumptive Taxation Schemes:

The existing provisions, provide for a presumptive income scheme for small businesses wherein resident assessees (i.e., an individual, HUF or a partnership firm other than LLP) carrying on eligible business and having a turnover or gross receipt of Rs.2 crore or less, can consider a sum of 6% of the turnover or gross receipts as the profits and gains from business if not more than 5% of turnover is received in Cash.

Similarly, presumptive taxation is available for small professionals having gross receipts upto Rs.50 lakhs can consider 50% of receipts as Income from profession.

In order to give benefits more persons, to ease compliance and to promote non-cash transactions, it is proposed to increase limit to Rs.3 crores (in case of business) and Rs.75 Lakhs (In case of profession) provided cash receipts from business or profession does not exceed 5% of total turnover/receipts.

Let’s understand above proposal with certain example:

Introduction of the authority of Joint Commissioner (Appeals)

The Commissioner is the first appellate authority under the Act's current provisions for an assessee who feels wronged by any orders made pursuant to the Act (Appeals).

It is proposed to create a new authority for appeals at Joint Commissioner/ Additional Commissioner level to handle certain classes of cases involving a small amount of disputed demand. Such authority has all powers and responsibilities similar to Commissioner (Appeals).

Reducing the time provided for furnishing TP report

According to the current Act's provisions, the AO or the CIT(A) may ask a person to deliver any document as specified by rule 10D of the Rules during any proceedings under Section 92D of the Act within 30 days of the date they receive a notification in this respect.

It is proposed to reduce the time limit provided to furnish the documents requested in the notice to 10 days from the date of receipt of a notice.

Alignment of timeline provisions for completion of assessment proceedings under section 153 of the Act

Under the existing provision of the Act, the timeline for completing assessment is 9 months from the end of the assessment year.

According to the Finance Act of 2022, if an updated return has been submitted by an assessee in accordance with section 139(8A), an assessment order must be issued before the lapse of nine months following the end of the fiscal year in which the updated return was submitted.

In order to provide sufficient time to taxpayers as well as natural justice to the assessee, it is proposed to increase the timeline to complete the entire process of assessment. The current and proposed timelines are tabulated as follows:

Penalty for furnishing inaccurate statement of financial transaction or reportable account (Form 61A or Form 61B)

Under the existing provision of Act, there is no penal provision for the submission of a false self- certification which in turn leads to furnishing of an incorrect statement under section 285BA of the Act.

Additionally, the reporting financial institution may retain a portion of any funds received from each of these reportable account holders or reclaim the amount that was paid on behalf of the account holder.

Further, the reporting financial institution may recover the amount so paid on behalf of the account holder or retain out of any amount that may be in its possession or may come to it from every such reportable account holder.

Excluding non-banking financial companies (NBFC) from restriction on interest deductibility

There are limitations on the deduction of interest expenses for debt issued by a non-resident who is a related enterprise of the borrower under the current provisions of the Act. Certain businesses involved in the banking or insurance industries are not covered by this provision.

It is proposed to provide a carve out to certain classes of NBFC to exclude them from the section 94B of the Act.

TDS on payment of accumulated balance due to an employee

Under the existing provision of Act, TDS @ 10% of the taxable component of the lump sum payment due to an employee under the Employees Provident Fund Scheme. In case employees do not have PAN and thereby TDS is being deducted at the maximum marginal rate.

It is proposed to provide the deduction of TDS on payment of EPF at the rate of 20% as in other non-PAN cases instead of maximum marginal rate.

Obtaining TDS credit for income that has already been reported in the previous year's income tax return

Tax is deducted by the deductor in the year that the income is actually paid to the assessee, in accordance with the law as it currently stands. According to the accrual system, the assessee may, however, have previously reported this income in prior years in their income tax return.

As a result, there is a TDS mismatch because the assessee has previously provided the relevant income to tax in prior years, but TDS is not deducted until much later, when the real payment is being made. Since income is not offered for taxation in the year in which tax is deducted, the assessee is not eligible to claim the TDS credit in that year.

It is proposed to give the assessee the option to submit an application to the Assessing Officer in the appropriate form within two years after the end of the fiscal year in which the applicable tax was withheld at source. The Assessing Officer will then revise the assessment order or any notification allowing credit for the tax that was withheld at source during the applicable assessment year.

Specifying time limit for bringing consideration against export proceeds into India by SEZ Units

The current Act does not provide a deadline for the timely remittance of export earnings from the sale of goods or the provision of services by SEZ Units in order to be eligible for a deduction under Section 10AA of the Act.

It is proposed to specify that the deduction under Section 10AA of the Act shall be available for such unit if the proceeds from the sale of goods or the provision of services are received in India by the assessee in convertible foreign exchange, or brought into India by the assessee, within a period of six months from the end of the previous year, or within such further period as the competent authority may allow in this regard.

Condition to file return return before due date u/s 139(1) to claim deduction u/s 10AA

Under the existing provision of Act, there is no condition mentioned to file return before the due date provided under section 139(1) of the Act for claiming deduction. However, according to Section 143(1), the deduction under Section 10AA is only valid if the return is submitted before the deadline.

By adding a provision to section 10AA's sub-section (1), it is suggested to harmonise the two clauses by stating that an assessee would not be permitted to take a deduction under the aforementioned section if they fail to submit their return of income by the deadline set forth in section 139. (1).