Budget 2023: Income Tax Deduction Limit Increased – Details here

In this article, we will cover

• What is Income Tax?
• Income Tax Deductions
• Income Tax Rate
• Are There Any Changes Under Section 80DD?
• Will the Government Raise the Exemption Limit?

Finance Minister Ms. Nirmala Sitharaman announced  the 2023-24 Union budget on February 1, 2023. This is the first budget in Amrit Kaal that mainly focused on achieving a knowledge-based and tech-driven economy with robust financial sector and public finances. The budget aims at achieving economic growth via administrative and continuous policy reforms, infrastructure development, supportive business ecosystem, all-round inclusive development and by upskilling the youth of India. 

The budget emphasizes on the following key aspects:

1. Infrastructure and Investment
2. Green Growth
3. Unleashing the potential 
4. Inclusive development 
5. Reaching the last mile 
6. Youth Power 
7. Financial sector 

The main highlights were the fiscal deficit, the National Green Hydrogen mission, and advancements in infrastructure, technology and logistics. In this era of layoffs and inflation, the incoming budget is believed to offer a respite from the present section 80D limit. In terms of direct tax, the new budget has come up with significant changes with respect to start-ups, personal taxation and promoting the growth and development of co-operative societies. There has been proposing provisions in the budget to help businesses in reducing their litigations and disputes. In terms of indirect tax, the year marked the highest revenue of GST ever since it was introduced.  Unlike every year, this year too, the finance minister has proposed a new regime of income tax deduction limit. Read more and know about it in detail. 

What is Income Tax?

Income tax is an essential component for governing a country. In the generic sense, it refers to tax collected from businesses and salaried individuals within a government's jurisdiction. This money is used to fund public services and provide goods for citizens.  In India, income tax is legally regulated by the Income Tax Act of 1961, which allows for the imposition of tax on money generated from lotteries/horse races, voluntary contributions received by a trust, dividends, profits, etc., since they fall under the category of income as per the act.

Income Tax Deductions

To reduce the amount of taxable income, individuals can avail of deductions depending on how they spend their money. However, the amount varies depending on what kind of benefit is claimed. In India, these deductions can be enjoyed by investing in life insurance, fixed deposits, loans, charity donations and health insurance. Of late, people have also been investing in Government-funded programmes like Sukanya Samriddhi Yojana, National Savings Certificate, Senior Citizen Savings Scheme, etc. Apart from this, investments in provident fund schemes EPF and PPF and equity-linked savings schemes (ELSS), etc., under Section 80C of Income Tax Act.

Income Tax Rate 

The following are the personal tax rates which we have broadly defined under new regime and old regime:

• New Regime (mandatory if you are not opting for old regime)
• For individuals:

Income Slabs (Rs.)	Proposed Interest rate (AY 2024-25)
Upto Rs. 3,00,000	Nil
Rs. 3,00,001 to Rs. 6,00,000	5%
Rs. 6,00,001 to Rs. 9,00,000	10%
Rs. 9,00,001 to Rs. 12,00,000	15%
Rs. 12,00,001 to Rs. 15,00,000	20%
Rs. 15,00,000 and above	30%

• Old Regime (must be opted)
• Individuals (not including senior citizens 

Income Slabs (Rs.)	Proposed Interest rate (AY 2024-25)
Upto Rs. 2,50,000	Nil
Rs. 2,50,001 to Rs. 5,00,000	5%
Rs. 5,00,001 to Rs. 10,00,000	20%
Rs. 10,00,001 and above	30%

• Senior Citizens (60 years to 80 years of age)

 

Income Slabs (Rs.)	Proposed Interest rate (AY 2024-25)
Upto Rs. 3,00,000	Nil
Rs. 3,00,001 to Rs. 5,00,000	5%
Rs. 5,00,001 to Rs. 10,00,000	20%
Rs. 10,00,001 and above	30%

• Super Senior Citizen (above 80 years of age)

Income Slabs (Rs.)	Proposed Interest rate (AY 2024-25)
Upto Rs. 5,00,000	Nil
Rs. 5,00,001 to Rs. 10,00,000	20%
Rs. 10,00,001 and above	30%

Deduction in Income Tax for Medical Liability

Section 80D of Income Tax Act allows a person to claim an income tax deduction for the health insurance premium and medical expenses related to preventive health checkups for self, parents, husband/wife and dependent children. The deduction limit is Rs. 25,000 for youngsters and Rs. 30,000 for senior citizens.

Why Income Tax Deduction is Important for Medical Expenditure?

Medical costs have increased incredibly after the COVID-19 pandemic, with a rise in health issues. Rising insurance costs caused by increased premiums have also been a major problem. This makes getting some relief from section 80D medical expenditure essential for salaried employees.

Why an Increase in Basic Income Tax Deduction is Required?

Recently, the Government introduced many attractive post office schemes to provide tax breaks on long-term savings so that more investors opt for the same. Many individuals invest in a five-year post office time deposit to receive a tax deduction under section 80C of the income tax act. At present, the exemption available under Section 80C is Rs 1.5 lakh which remains the same as per 2023 budget.

Standard Deduction Limit to be Increased

People have been forced to increase their living costs due to high inflation. Considering that the standard deduction as per Section 16 (IA) of the Income Tax Act is just Rs. 50,000, it has been a sincere demand that the deduction limit be increased. The Budget 2023-24 has extended the benefit of the standard deduction provided under Section 16 of the income tax act to the new tax regime also. “My proposal is for the salaried class and the pensioners, including family pensioners, for whom I propose to extend the benefit of standard deduction to the new tax regime. Each salaried person with an income of  Rs 15.5 lakh or more will thus stand to benefit by Rs 52,500,” finance minister Nirmala Sitharaman said while presenting the Union Budget on February 1, 2023.  Under the section, the standard deduction of Rs 50,000 is offered to taxpayers in India.

Are There Any Changes Under Section 80DD?

As previously mentioned, medical expenses have been a concern for individuals post-COVID-19. Section 80DD of the income tax act that enables an individual to bear the costs of medical treatment of a disabled dependent is looking forward to a rehaul as it is speculated that the government may increase the tax-free slab. This is important because different kinds of disabilities require different forms of treatment. The mental trauma and physical effort the relatives undergo during this cannot be compensated. So the least that can be done is to consider an increase in the deduction limit under the section.  The following is the deduction limit under Section 80DDB of Income Tax Act:

Age of Taxpayer	Deduction limit
Less than 60 years	Rs 40,000 or actual expenses, whichever is less
60 years to 80 years	Rs 1 lakh or actual expenses, whichever is less
81 years and above	Rs 1 lakh or actual expenses, whichever is less

Deduction under Section 80DDB

Section 80DDB of the income tax act has been another significant provision concerning tax deductions. Under this, individuals, except NRIs, can claim tax deductions for treating certain diseases. As per the list issued by the Income Tax Department, this may include Dementia, Parkinson's Disease, Malignant Cancers, Thalassaemia, etc.  However, only the following individuals are allowed to claim the same-

• Individual taxpayers or 'assessees’ who undergo treatment
• A dependent is a parent, sibling, spouse or child.
• Resident Indians
• A dependent is insured and reimbursed by his employer.
• Individuals or Hindu Undivided Families
• When the taxpayer has paid for the treatment of a dependent

The section provides for availing of the deduction by adjusting the payment made by the insurer against the employer's reimbursement or a health insurance policy. Further, payments made to programmes like National Pension Scheme or Atal Pension Scheme also fall under this section. Over the years, this deduction limit has increased to provide lower and middle-income families with some relief. 

Deduction Trends 

The Union Budget 2020-21 had come up with an optional income tax regime. Under it, individuals and Hindu Undivided Families were allowed to be taxed at lower rates if they did not avail of specified deductions and exemptions like house rent allowance or investments made under section 80C of the income tax act. It was justified on the grounds that instead of coming up with a parallel system with no exemptions, it was better to have more favorable tax rates. Ahead of the 2023 budget, this increases the possibility of something similar happening. This will allow investors to have more money to invest.

Will the Government Raise the Exemption Limit?

The Finance Minister is expected to balance out the interests of common taxpayers with more significant issues like GDP growth, employment, push for infrastructure, fiscal deficit, manufacturing etc.  Given the conflicting macroeconomic conditions and the grim geopolitical scenario last year, middle-class taxpayers had to suffer a lot. Thus, it is expected that income tax provisions allowing deductions on life-saving drugs, hospitals and health insurance will almost certainly be reduced.

• Standard Deduction

In India, the Income Tax Act provides tax benefits for interest earned from savings accounts through the Section 80TTA deductions and 80TTB deductions. These deductions help reduce your taxable income and increase your overall savings.  For the Assessment Year (AY) 2022-23, the 80TTA deduction can be claimed by individuals and Hindu Undivided Families (HUFs) who have earned interest from their savings account. The maximum amount that can be claimed as a deduction is INR 10,000, and any interest earned above this limit will be taxable. It is also important to note that the 80TTA deduction can be claimed only once in a financial year and cannot be carried forward to the next financial year. Therefore, it is crucial to ensure that you claim the full amount of INR 10,000 in the financial year in which you earn the interest. The new tax regime, introduced in the Budget 2023, offers taxpayers a simplified tax structure with lower tax rates in exchange for giving up various exemptions and deductions. The 80TTA deduction is one of the exemptions that taxpayers have to forego if they opt for the new tax regime. This means that if you choose the new tax regime, you will not be able to claim the 80TTA deduction for the interest earned from your savings account, even if you are an individual or Hindu Undivided Family (HUF). The 80TTB deduction for senior citizens is also not applicable in the new tax regime. It is important to note that the new tax regime is optional and taxpayers can choose to continue with the old tax regime if they so desire. This choice will depend on your personal financial situation, tax liability, and other factors.

• Inequality among Income Groups

A divide can be noticed between lower and higher income groups nowadays. The World Inequality Report has also shown that the rich are turning richer and the poor are turning poorer. Thus, there is a stronger case for raising tax slabs for higher-income groups. For a good global image, it is speculated that dividend taxation will be exempt for small equity holders.

• Increasing Deductions over Lesser Tax Rates

Many people have argued that deductions for health, rent, social security and savings will be more beneficial than lower tax rates. This will be helpful for personal income taxpayers. However, which of the two will the Government prioritize remains a greater question.  Reduced tax rates may increase consumption, thereby increasing capacity utilization. Investing in capital assets will help reduce logistics and other input costs, resulting in a few percentage point reduction in production costs. This would also significantly boost the GDP.

• Amending Section 80Ccal

According to Section 80CCE of the Income Tax Act, the total maximum deduction available under Sections 80C, 80CCC, 80CCD (1), and 80CCD (2) is 1.5 lakh. Considering this, it is argued that the deduction limit under 80CCE section, which is too low comparatively, should be increased. Term insurance has also become quite common nowadays in protecting against life and disability risks. Thus, it should be brought under 80C.  Further, despite paying a lot of income tax during their working lives, taxpayers get nothing in return when they retire. It is still a one-way street. However, the government should allow honest taxpayers to save significantly for their future through the NPS. The NPS contribution can be separated from Section 80C and then raised. Since, it is not possible for the Government to provide social security to taxpayers in the near future, it may adopt such measures in henceforth this budget to come up with a win-win solution for taxpayers and Government alike. This budget shall unfold a lot of saving and investment opportunities. Prepare yourself for the best by opening a free demat account with Samco Securities. We are an advanced investing platform that will help you keep track of the market index and analyze personal performance.