Deductions, exemptions, and tax slabs

Kamal Baruah

(kamal.baruah@yahoo.com)

On a budget day, there has been a lot of discussion about increasing the rebate limit. Profits and incomes are increasing at a slower pace in comparison to the continuous increase in the cost of goods, while the government’s overriding concern is to reduce inflation. As the inflation rate surges globally, middle-income families find it increasingly difficult to cope with their aspirations and goals.

However, homemakers are very concerned about, how to manage their financial situations. Besides creating a monthly budget and emergency fund, it’s always advisable to save at least 20 percent of income and for liability; a person should have term insurance coverage, while debts are to be paid as soon as possible. PPF and SSA are good saving options as their interest and maturity amounts are tax-free, and it’s wise to save early for a longer period of time to see the magic of compound interest.

The Union Budget 2023 announced what everyone was waiting for: personal income tax reform with proposals for rationalisation of tax structure to benefit the hard-working middle class, which is expected to raise disposable income and facilitate the transition to the New Tax Regime with minimal exemptions and simpler or lower tax slabs. Ironically, many taxpayers were reluctant to opt for the existing new tax regime since FY 2020–21 as most of the deductions and exemptions were not available. However, the recent change in this budget has made this option more lucrative.

The rebate limit now increases to Rs 7 lakh from Rs 5 lakh in the new tax regime (proposed). The number of slabs reduces to 5, and rates are revised, however, the basic exemption limit fixes at Rs 3 lakh from Rs 2.5 lakh. For every Rs 2.5 lakh income increment, the tax rate increment was 5%, whereas for each Rs 3 lakh income increment, the tax rate increment would be 5%, and there wouldn’t be any 25% slab rate. The new tax regime becomes the default option. The highest surcharge rate is capped at 25% instead of 37%, and it gives exemptions on leave encashment upon retirement for non-government salaried employees up to Rs 25 lakh.

The enhancement also signifies not to invest anything to claim exemptions except the following. Under the revised new scheme, taxpayers are eligible for deductions from employer contributions to NPS [section 80CCD (2)], deductions for new employment creation [section 80JJAA], a standard deduction of Rs 50,000 [section 16(IA)], a family pension deduction of Rs 15,000 [section 57], and a contribution to the Agniveer Corpus Fund [section 80CCH]. However, all deductions from sections 80C-80U [except 80CCD (2) and 80JJAA], housing loan interest, HRA exemption, LTA exemption, professional tax, etc., are now ineligible.

The new scheme certainly seems more lucrative for the taxpayers who are either reluctant to invest in specified schemes to become eligible for deductions or don’t want to invest at all. But for those who are already covered under the old regime and opting-in to choose the new regime, a comparative analysis of the tax liability is required before choosing the right scheme. The switchover scheme is possible only once in a lifetime, while tax payers can shift every year as long as their income does not consist of either business or profession.

As the FY (fiscal year) concludes by March 31st, an assessee is liable to pay taxes against any kind of income earned or any losses incurred for a particular AY (assessment year) under the Income Tax Act of 1961. A four-month window extends for every AY to the non-audit cases, and taxpaying individuals must consolidate their income details for the relevant FY and file their ITR on or before July 31 for non-audit cases and September 31 for audit cases. A form in which taxpayers declare their income details; tax payable on their income, exemptions, and deductions for a particular FY is known as an ITR (income tax return).

However, missing the ITR deadline has legal consequences as per Section 234F, including a maximum penalty of Rs 5,000 (Rs 1,000 for total income below Rs 5 lakh) and possible tough imprisonment. Apart from the penalty, interest will be charged under Section 234A at 1% per month or part thereof on the tax due until the payment of taxes. Not everyone needs to file an ITR mandatorily unless their income exceeds the basic exemption limit of Rs 2.5 lakh (Rs 3 lakh for senior citizens, Rs 5 lakh for super senior citizens, and Rs 7 lakh from FY 2023–24) or other conditions specified under Section 139(1) are met.

As the deadline nears, it’s time to gather statements such as Form 16 (salary income), Form 16A (other income), interest earned from savings accounts, and other tax saving investments or exemptions from banks, Treasury Departments, and employers. Form 16 is a certificate issued by employers to their employees that reflects a detailed summary of the total salary and TDS that have been deducted at source and remitted to the government exchequer. Form ITR-1, or Sahaj, is largely used by the salaried class of taxpayers. ITR-V is used to acknowledge the filing of an ITR along with the net banking, ATM, and Aadhaar links once it is submitted. Senior citizens above 75 years old can get a full exemption from ITR filing. Let’s file ITR at the earliest to avoid last minute rush.