Optional New Income Tax Rates 2023: The finance Act, 2020 brings a new income tax slab rates for Individual and Hindu Undivided Family (HUF). This new income tax rates is effective for Financial Year (FY) 2022-23 relevant to the Assessment Year (AY) 2023-24.
Now, there will be no tax on income earned up to ₹2.5 lakh. In new income tax slab, you will have to pay income tax @5% for total income earned above ₹2.5 lakh. Accordingly, if your income is ₹5 lakh and opt for this new income tax rates prescribed u/s 115BAC, you will be liable to pay income tax of ₹12,500.
If you have any business income and you exercises option in this section then you can only one time withdraw from the option and thereafter never be eligible for again exercising the new income tax rate u/s 115BAC.
This new optional personal income tax regime provides significant relief to middle class taxpayers. Did you know? Govt. forgoes an estimated revenue of ₹40,000 crore per year in this optional tax regime.
Tax on income of individuals and Hindu undivided family
Income Tax Rates from April 2020 [Section 115BAC (1)]:
Government has introduced optional income tax rate for Individual and Hindu Undivided Family. This optional income tax rates will be available from 1st April, 2020. That means if you will earn income from April 2020 to March 2021, you can opt for this facility.
If you exercise the option of section 115BAC then your tax liability shall be computed as per the following tax rate slab:
| Taxable Income Slab | Income Tax Rate |
|---|---|
| Up to ₹2,50,000 | NIL |
| From ₹2,50,001 – ₹5,00,000 | 5% |
| From ₹5,00,001 – ₹7,50,000 | 10% |
| From ₹7,50,001 – ₹10,00,000 | 15% |
| From ₹10,00,001 – ₹12,50,000 | 20% |
| From ₹12,50,001 – ₹15,00,000 | 25% |
| Above ₹15,00,000 | 30% |
Therefore, your total income shall be computed at the rate of income tax given here under:
- No tax for taxable income up to ₹2.5 Lakh
- 5% of next ₹2.5 Lakh for taxable income up to ₹5 Lakh
- ₹12,500 plus 10% of next ₹2.5 Lakh for taxable income up to ₹7.5 Lakh
- ₹37,500 plus 15% of next ₹2.5 Lakh taxable income up to ₹10 Lakh
- ₹75,000 plus 20% of next ₹2.5 Lakh taxable income up to ₹12.5 Lakh
- ₹1,25,000 plus 25% of next ₹2.5 Lakh taxable income up to ₹15 Lakh
- ₹1,87,500 plus 30% of taxable income ₹ 15,00,000.
The above income tax rate is applicable for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2021.
Comply Condition for New Income Tax Rates
If you will not satisfy the conditions mentioned in Section 115BAC (2) then the option shall become invalid. Thereafter, other provisions of the Income Tax Act 1961 will apply to compute your income tax liability for that previous year.
However, if the option is exercised under Section 115BAC(5)(i) and failed to satisfy conditions contained in Section 115BAC (2) then the option shall become invalid for subsequent assessment years.
No Deduction and Exemption [Section 115BAC (2)]:
If any individual or HUF choose income tax rates mentioned above then the total income shall be computed without any deduction under any of the provisions of Chapter VI-A, exemptions and set-off of losses.
(i) Without any Exemption or Deduction-
- Travel concession or assistance [Clause (5) of section 10]
- Payment of rent on residential accommodation [Clause (13A) of section 10]
- [Clause (14) of section 10] (other than those as may be prescribed for this purpose)
- [Clause (17) of section 10]
- [Clause (32) of section 10]
- Special provisions in respect of newly established Units in SEZ [Section 10AA]
- Deductions from salaries [Section 16]
- Interest on borrowed capital for house property used for own residence [Clause (b) of section 24]
- Depreciation on new machinery or plant [Section 32(1)(iia)]
- Investment in new plant or machinery in notified backward areas in certain States [Section 32AD]
- Tea development account, coffee development account and rubber development account [Section 33AB]
- Site Restoration Fund [Section 33ABA]
- Payment for scientific research to research association [Section 35(1)(ii)]
- Payment to company for scientific research [Section 35(1)(iia)]
- Payment to research association for social science or statistical research [Section 35(1)(iii)]
- Payment for scientific research to National Laboratory/ University/ IIT [Section 35(2AA)]
- Deduction in respect of expenditure on specified business [Section 35AD]
- Expenditure on agricultural extension project [Section 35CCC]
- Deduction for family pension [Clause (iia) of section 57]
However, he may claim deduction under the provisions of-
- Section 80CCD(2) – Deduction in respect of contribution to pension scheme of Central Government
- Section 80JJAA – Deduction in respect of employment of new employee.
(ii) without set off of any loss:
- Carried forward losses or depreciation attributable to any of the deductions referred above;
- Losses under the head “Income from house property” with any other head of income;
- By claiming the depreciation except Section 32(1)(iia); and
- Without any exemption or deduction for allowances or perquisite
No deduction for subsequent year [Section 115BAC(3):
There will be no further deduction shall be allowed in any subsequent year for the loss and depreciation referred above in Section 115BAC(2)(ii).
However, depreciation allowance of block of assets shall be made to WDV as on 1st April, 2020, if the option under section 115BAC(5) is exercised for previous year 2020-21.
Unit in IFSC [Section 115BAC(4):
If you have Unit in International Financial Services Centre (IFSC) and exercised option of Section 115BAC(5) then conditions of section 115BAC(2) shall be modified to the extent that the deduction u/s 80LA shall be available to such Unit.
Note that Unit shall have the meaning assigned to it in clause (zc) of section 2 of the Special Economic Zones Act, 2005.
One way option for Business Income [Section 115BAC(5):
You have to exercise this optional personal tax regime in the following prescribed manner:
- Person having Business Income on or before Income tax return filing due date i.e. 31st July/ 30th September and such option once exercised shall apply to subsequent assessment years;
- Person having No Business Income alongwith the return of income for previous year.
The first option (business income) only once can be withdrawn after exercise and thereafter, the person shall never be eligible to exercise option under this section, except where such person ceases to have any business income in that option.
Difference between Old and New Personal Income Tax Rates
Following table will show you the difference between the slab rates of income tax:
| Taxable Income Slab in ₹ | New Income Tax Rate | Old Income Tax Rate |
|---|---|---|
| 0 to 2.5 Lakh | Exempted from Tax | Exempted from Tax |
| 2.5 Lakh to 5 Lakh | 5% | 5% |
| 5 Lakh to 7.5 Lakh | 10% | 20% |
| 7.5 Lakh to 10 Lakh | 15% | 20% |
| 10 Lakh to 12.5 Lakh | 20% | 30% |
| 12.5 Lakh to 15 Lakh | 25% | 30% |
| Above 15 Lakh | 30% | 30% |
If you compare the new optional income tax regime with the existing income tax rates, you will definitely go for the new one.
| Taxable Income | Tax using Old Tax Rates | Tax using New Tax Rates | Tax Saving under New Tax Regime |
|---|---|---|---|
| ₹250000 | ₹0 | ₹0 | ₹0 |
| ₹500000 | ₹12500 | ₹12500 | ₹0 |
| ₹750000 | ₹62500 | ₹37500 | ₹25000 |
| ₹1000000 | ₹112500 | ₹75000 | ₹37500 |
| ₹1250000 | ₹187500 | ₹125000 | ₹62500 |
| ₹1500000 | ₹262500 | ₹187500 | ₹75000 |
Note: The above table shows tax liability without claiming any exemption and deduction under the Income-tax Act, 1961.
Wait! Before you apply new tax rates, you must consider the following Frequently Asked Questions (FAQs), suggestions and recommendations:
Question-1: Which one Income Tax Rates is better for my income in FY 2022-23?
Answer: This is very common question of many individual tax payers. Whether you choose the new optional tax regime or not.
Actually, you have to calculate your income tax liability applying both income tax slab rates and then choose the option under which your tax liability will be nil or less than other option. In other words, calculate your tax liability under the old tax rate slab as well as new optional tax regime thereafter the best option.
Question-2: From which year new income tax rates are applicable?
Answer: The new personal income tax slab rates are applicable from previous year 2020-2021 relevant to the assessment year 2021-2022. That means from 1st April, 2020 the new income tax rates are applicable.
Total taxable income earned during FY 2020-21 shall be taxable in AY 2021-22. Therefore, if you earn income from April 2020 to March 2021 then you may go for the new personal income tax slab rates while filing income tax return in the year 2021.
Question-3: Whether the new tax rates are applicable in CA Final May 2023 or CA Intermediate May 2023 examinations?
Answer: The Finance Act 2022 is applicable for previous year 2022-23 i.e. assessment year 2023-24. That means the provisions of newly inserted section 115BAC will be applicable from financial year 2022-23.
Therefore, the new tax regime will be applicable for all professional examinations to be conducted in the year 2023. Hence, the new optional personal income tax rates are applicable for the following examinations: