NEW TAX REGIME: NO TAX ON INCOME OF RS. 7 LAKH* [* Terms & Condition Apply]




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NEW TAX REGIME: NO TAX ON INCOME OF RS. 7 LAKH*
[* Terms & Condition Apply]

Every individual with income not exceeding Rs. 7 Lakh (excluding income chargeable to special rate of tax) will not be required to pay any tax under the New Tax Regime (NTR). Salaried individuals also benefit from a standard deduction of Rs. 50,000, making the effective tax-free limit Rs. 7.50 lakh for them. However, it’s important to clarify that the Basic Exemption Limit (BEL) hasn’t actually been raised to Rs. 7 lakh, as some mistakenly believe. Let us know about nuances & intricacies of the tagline “No Tax on income up to Rs. 7 Lakh”.

  1. Basic Exemption Limit: For the financial year 2023-24, BEL has been increased to Rs. 3 lakh only for taxpayers choosing NTR & not to Rs. 7 lakh. Those sticking to the old regime will continue with the Rs. 2.50 lakh exemption limit. As such, Rs. 7 Lakh is not the BEL, neither under the old tax regime nor under the new tax regime.
  1. Tax Rebate U/s 87A: Up until the financial year 2022-23, taxpayers earning up to Rs. 5 lakh were entitled to a tax rebate of Rs. 12,500 under section 87A. This rebate amount was the same whether taxpayers opted for the old or new tax regime. However, starting from the financial year 2023-24, the rebate limit has been increased to Rs. 25,000 for taxpayers choosing the NTR. Here’s how the tax rebate works under section 87A for the FY 2023-24:
    a) For taxpayers opting for the old tax regime:Tax rebate shall be maximum of Rs. 12,500/- subject to the condition that the total income doesn’t exceed Rs. 5 Lakh.
    b) For taxpayers opting for the NTR: Tax rebate shall be a maximum of Rs. 25,000/- subject to the condition that the total income doesn’t exceed Rs. 7 Lakh.
  1. Different Rules for New vs. Old Regime: The exemption limits and tax rebates differ depending on whether you opt for the new or old tax regime. The key criteria for claiming rebate under section 87A is an income not exceeding Rs. 5 lakh or Rs. 7 lakh.
  1. Limitations on Rebate: No tax rebate under section 87A is admissible against any tax arising due to LTCG from shares/equity mutual funds. There is no restriction for claiming 87A Rebate against STCG from sales of shares through stock exchange or other capital gain amount.
  1. Increase in income of Rs. 100/- may result in the additional tax liability of Rs. 12,500/- under Old Tax Regime:
    For the person opting for old tax regime, the tax rebate of Rs. 12,500/- is available subject to the condition that the income doesn’t exceeds Rs. 5 Lakh. If the income exceed Rs. 5 Lakh even by Rs. 100/-, no rebate of Rs. 12,500/- would be available to the taxpayers. In such a case, mere income of Rs. 100/- may result in additional tax liability of Rs. 12,500/- (plus cess).
  1. Marginal Relief to the Taxpayers opting for NTR with income slightly above Rs. 7 Lakh:
    Above anomaly of additional tax liability has been removed for the taxpayers in NTR.  Finance Act- 2023 has introduced the concept of marginal relief for the taxpayer under NTR. As a result of this, if the income of the person exceeds even marginally, say Rs. 100/-, the tax liability will not exceed the amount of income above Rs. 7 Lakh. For example, Mr. Smart who is under the NTR has a regular income of Rs. 7,00,100/-. Though the income is exceeding Rs. 7 Lakh, the law now provides that the tax liability shall be restricted to Rs. 100/- only. One may note that the benefit of marginal relief is available only if the taxpayer is in NTR and not to those who are opting for the OTR.
  1. Limit of Rs. 7 Lakh vis a vis Long Term Capital Gain (LTCG) on sale of Shares/Equity Mutual Funds:
    Let us consider the case of Mr. Smart who has opted for the NTR with regular income of Rs. 7 Lakh & LTCG from sale of shares of Rs. 1 Lakh. Whether Mr. Smart would be entitled for tax rebate or not? In this case, the income of Mr. Smart shall be Rs. 8 Lakh & not Rs. 7 Lakh & so he will not be eligible for any tax rebate U/s 87A as the primary condition of income not exceeding Rs. 7 Lakh is violated. Income Tax law provides that LTCG from sale of shares in stock exchange is taxable @ 10% & the tax is payable on an amount exceeding Rs. 1 Lakh. One may note that the LTCG is not exempt from tax though it is not liable for taxation up to Rs. 1 Lakh.
  1. Illustration as to the impact of Enhanced Tax Rebate U/s 87 for taxpayers in New Tax Regime:
    The following chart with 5 different cases may enable us to understand the discussion on availability of tax rebate U/s 87A. One may note that though the income in case No. 1 to 4 is not exceeding Rs. 7 Lakh, still the tax liability is not zero:
Particulars Case-1  Case-2 Case-3 Case-4 Case-5
Regular Income 5 Lakh 5 Lakh 0 0 7 Lakh
LTCG on Shares 2 Lakh 0 7 Lakh 0 1 Lakh
LTCG on Other Long Term Assets 0 2 Lakh 0 0 0
STCG on Shares 0 0 0 7 Lakh 0
Total Income 7 Lakh 7 Lakh 7 Lakh 7 Lakh 8 Lakh
Tax on Regular Income 10,000 10,000 0 0 25,000
Tax on LTCG U/s 112A 10,000 0 30000 0 0
Tax on LTCG U/s 112 0 40,000 0 0 0
Tax on STCG U/s 111A 0 0 0 60,000 0
Total Tax 20,000 50,000 30,000 60,000 25,000
Tax Rebate U/s 87A 10,000 25,000 0 25,000 0
Tax Payable (Excl.  Cess) 10,000 25,000 30,000 35,000 25,000

Remarks:

  1. Case – 1: No tax rebate is available against LTCG on shares.
  2. Case -2: Since the total income is not exceeding Rs. 7 Lakh and since no tax is there on LTCG on shares, tax rebate of Rs. 25K would be admissible.
  3. Case -3: The benefit of BEL is available against all LTCG & balance is taxable @10% U/s 112A without rebate U/s 87A.
  4. Case -4: The benefit of BEL limit & Section 87A is available against STCG & balance is taxable @15%..
  5. Case -5: Since total income is more than Rs. 7 Lakh, no rebate is admissible U/s 87A.

Conclusion:

The new tax regime has been carefully designed to become the favored choice for the majority of taxpayers. However, it’s important to note that in tax law, every benefit comes with some terms & conditions attached to it. It’s crucial to understand the nuances and conditions associated with the benefits provided as every change directly impacts tax obligations

 

[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com.  Other articles & response to queries are available at www.theTAXtalk.com]

 

The copy of the order is as under:

Particulars NEW




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