Budget FY 2023-24 – Tax on Salary

The Union Budget for FY 2023-24 was tabled in the Parliament by the Finance Minister of India on 01-Feb-2023. Here are the key proposals related to computation of tax on salary which payroll managers need to consider for FY 2023-24, effective 01-Apr-2023.

Changes to tax slabs under the new regime

Section 115BAC (New Regime) allows employees to opt for lower tax rates (as against the rates under the old regime) subject to their foregoing certain exemptions / losses / deductions. For FY 2023-24, the slab rates under the new regime have been modified as follows.

Total Annual Income (Rs) New Regime (%) – FY 2023-24
Up to 3,00,000 Nil
3,00,001 to 6,00,000 5
6,00,001 to 9,00,000 10
9,00,001 to 12,00,000 15
12,00,001 to 15,00,000 20
Above 15,00,000 30

In addition, for FY 2023-24, the new regime shall be the default regime for tax calculation. In FY 2022-23, the old regime was the default regime. In other words, if an employee does not specify their preference with regard to the regime for tax calculation, the employer shall use the New Regime for the purpose of tax calculation. 

Rebate under Section 87A increases for the New Regime

The rebate under section 87A has been increased to Rs 25,000 for FY 2023-24 (it was Rs 12,500 for Rs FY 2022-23).  This means that employees with up to Rs 7 lakh as the total income (after all deductions and exemptions) will have zero tax liability. Please note that the enhancement in Section 87A relief shall be available only for the New Regime in FY 2023-24. For the Old Regime, the Section 87A relief shall remain the same as that for FY 2022-23.

Reduction of Surcharge under the New Regime

In the New Regime, the rate of surcharge on income above Rs 5 crore has been reduced to 25% for FY 2023-24 (it was 37% for FY 2022-23). The rates of surcharge for FY 2023-24 under the New Regime shall be as follows.

Total Taxable Income (Rs) Surcharge (%)**
Greater than Rs 50 lakh and less than or equal to Rs 1 crore 10
Greater than Rs 1 crore and less than or equal to Rs 2 crore 15
Greater than Rs 2 crore and less than or equal to Rs 5 crore 25
Greater than Rs 5 crore 25

**Subject to marginal relief.

Health and Education Cess stays unchanged

The “Health and Education Cess” stays at 4% on income tax and surcharge, if applicable.

Deductions under the New Regime

For availing the lower slab rates (than those in the Old Regime) under the New Regime, employees need to forego exemptions and deductions such as House Rent Allowance exemption under section 10(13A), Leave Travel Allowance exemption available under section 10(5), and most of the deductions under Chapter VIA (80C etc.) while computing the taxable income.

However, for FY 2023-24, the following benefits are available for the New Regime.

  1. Standard Deduction – Rs 50,000.
  2. Deduction under Section 80CCD(2) – contribution to pension scheme of Central Government.
  3. A new deduction under Section 80CCH(2) – contribution to Agniveer corpus fund. This deduction is available to the Old Regime too.

Slab rates for the Old Regime remain the same

The tax rates for salaried employees below 60 years of age for FY 2023-24 shall be the same as those for FY 2022-23.

The tax rates (for FY 2023-24) for salaried employees below 60 years of age shall be as follows.

Total Income for the Year in Rs Tax Rate in %
Up to 2,50,000 Nil
2,50,001 to 5,00,000 5
5,00,001 to 10,00,000 20
Above 10,00,000 30

The tax rates (for FY 2023-2024) for salaried employees aged 60 years and above but below 80 years shall be as follows.

Total Income for the Year in Rs Tax Rate in %
Up to 3,00,000 Nil
3,00,001 to 5,00,000 5
5,00,001 to 10,00,000 20
Above 10,00,000 30

Rebate under Section 87A, surcharge and education cess remain the same under the old regime.

Currently, the Old Regime is used by a majority of the employees for tax calculation. The changes in the budget clearly point to a nudge in the direction of the New Regime.

Leave encashment taxability

Salary on account of leave encashment at the time of retirement (superannuation or otherwise) shall be exempted from tax up to a limit of Rs 25 lakh in FY 2023-24 (the limit was Rs 3 lakh in FY 2022-23).

Perquisite value of rent free/ concessional accommodation

The Income Tax department shall prescribe a revised method for calculation of the perquisite value of rent free/concessional accommodation provided to employees. 

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