Tax-free slab may be increased to Rs. 5 lakh under new regime in Budget 2023

Officials at North Block, the headquarters of the Union Finance Ministry, are exploring the possibility of increasing the tax-free slab to Rs 5 lakh in the two-year Alternative Personal Income Tax Scheme. It is important to mention in this context that as per the current tax laws, a person is required to pay tax in case his or her taxable income in India exceeds the basic exemption limit. The general exemption limit is Rs 2.50 lakhs per year.

Many experts believe that the cost of living has increased due to constant inflation, while the tax burden has not changed. It's time to cut personal income tax rates in an effort to increase disposable income and jump-start the demand cycle. More importantly, the recent comprehensive budget for the second term of the National Democratic Alliance (NDA) government is likely to provide some relief to the wage-earning class through price rationalization.

Citing an anonymous government official, Business Standard reports that raising the cap will reduce tax bills for residents, leaving them more money to make decent investments. Currently, very few taxpayers have opted for the alternative tax system. If taxpayers take advantage of tax breaks like Section 80c and Section 80d, the tax liability in the old personal income tax system is reduced.

However, there is no benefit for any type of deductions in the alternative tax structure. Up to Rs 5 lakh per year tax free. Taxpayers get a refund for the tax payable in slab of Rs 2.5 to 5 lakhs. "Those who earn up to Rs 5 lakh will not pay any tax under either the old or the new system," Finance Minister Nirmala Sitharaman said in 2020.

This issue was raised during the current budget exercise and concerned departments were asked to recommend ways to improve the system. "The budget exercise on taxes will start next week and we will consider the possibility of such a change in the new system," the official was quoted as saying by the financial daily.

However, the official added that while any such move is considered, we need to see how much this change will affect overall revenue and whether the government has room to do so.

In addition, he noted that a preliminary estimate of the revenue impact on the net tax increase under the new system has been made and can be sent to budget holders for consideration, adding that there may be discussion about whether both the old like the new it is necessary to change the systems to tax personal income.

In the 2020-2021 budget, the new system of alternative personal income tax rates with a lower tax rate was introduced as an option. However, estimates have shown that only 10-12 percent of taxpayers chose it due to higher tax liabilities compared to the previous system. Also, direct tax reforms are discussed, including the restructuring of the capital gains tax.