Articles

With a view to make the new personal tax regime u/s 115BAC more attractive and to encourage more and more individuals to switch to the new regime, in order to reduce the perceived complexities in return filing and assessments arising out of the plethora of deduction claims of the taxpayers, applicable in the old regime, the Union Budget 2023 has increased the available limit of rebate u/s 87A, from existing Rs. 5 lakhs to Rs. 7 lakhs in the new personal tax regime, w.e.f. financial year 2023-24 and onwards.

It needs to be understood here that the above relief is in the form of a tax rebate u/s 87A only and not by way of an increase in the basic exemption limit in the personal tax slabs. The relief in the form of increase in the basic exemption limit in the personal tax slabs in the new regime is only amounting to Rs. 50,000 as the basic exemption limit has been increased from existing Rs. 2.5 lakh to Rs 3 lakh in the new personal tax regime.  

Thus, the individuals and HUFs opting for the new regime in FY 2023-24 and onwards, and having their annual Gross Total Income (GTI) of upto Rs 7 lakhs, other than long term capital gains on listed securities u/s 112A of the Act, will not be required to pay any income tax, as they will be able to claim a rebate of Rs 25,000 u/s 87A of the Income Tax Act.

However, what if one earns just 5 Rupees more than the annual GTI of Rs 7 lakh, i.e., Rs 7,00,005?

Let us understand this with the help of an example. Suppose Mr. A is a salaried employee working in M/s ABC Pvt Ltd, drawing an annual Salary income of Rs. 7,50,005 in the FY 2023-24.

So, what will be his income tax liability, if he opts for the new regime u/s 115BAC?

As per the budget amendment, Mr. A will be able to claim the standard deduction of Rs 50,000 from his annual salary income of Rs. 7,50,005, even under the new regime.

So, his annual GTI, after claiming the allowable deduction in respect of standard deduction of Rs 50,000 will come out at Rs. 7,00,010 after rounding off u/s 288A.

Now in this case, the annual GTI of Mr. A, is in excess of the specified threshold limit of rebate of Rs. 7 lakhs income, u/s 87A, just by Five Rupees only, but as per the existing schema of the prescribed tax slabs in the new regime, Mr. A will not be able to claim the rebate of Rs 25,000 u/s 87A, and his entire GTI of Rs 7,00,010, will become taxable, at the applicable slab rates in the new regime.

The income tax liability of Mr. A in this case, will come out at Rs. 26,000 (Rs. 25,000 as basic income tax and Rs. 1,000 as health and education cess).

Thus, just Five Rupees of an additional income in excess of Rs 7 lakh, will force Mr. A, to shell out an additional income tax amount of Rs. 26,000/-.  Had his GTI was only Rs. 7 lakhs, and not Rs. 7,00,005, he wouldn’t have been required to pay any income tax.

Let us work out some more income levels to test this peculiar paradoxical situation, symbolizing the law of diminishing returns, as under:

(Amount in INR)

Thus, based on above calculations, it is clearly evident that this paradox of incurring of an income tax liability higher than the amount of income earned, in the new tax regime u/s 115BAC, starts from an income level of Rs. 7,00,005/- and it continues upto an income level of Rs. 7,29,000/-.

Now, continuing with our above example, what would the employee Mr. A do?

Well, he will have to ask his employer company, to reduce his salary by Rupee One to Rs. 7,50,004, from the existing Rs. 7,50,005. Then as per rounding off provision in section 288A, his income will get rounded off to Rs. 7,00,000, and as such he then will not be required to shell out an additional amount of Rs. 26,000/- as income tax.

Thus, w.e.f. FY 2023-24, the individuals and HUFs, having their annual gross total income levels of Rs 7,00,005 and upto Rs. 7,29,000, and opting for the new tax regime u/s 115BAC, will be better off, foregoing their income differentials, starting from rupee one and upto Rs. 29,000 /-, rather than paying more income tax than the amount of income earned above Rs. 7 lakhs, so as to avoid the additional tax liability.

And that is the reason that certain salaried employees like Mr. A in our example, having their annual salary incomes, ranging between Rs. 7,50,005/- to Rs. 7,79,000/-, would want a reduction in their salaries, ranging from rupee one to Rs. 29,000/-, respectively, from their employers, in the coming FY 2023-24 and onwards. 

In order to avoid this funny situation, the Ministry of Finance should consider bringing a suitable amendment in the existing section 115BAC, so as to provide ‘Marginal Relief, to such individuals and HUFs, having their respective annual gross total incomes ranging between Rs. 7,00,005/- and upto Rs. 7,29,000/-, in FY 2023-24 and onwards.

It is pertinent to note that currently, the marginal relief is being provided to those taxpayers, whose regular income taxable at their respective slab rates, is below the basic exemption limit and they are also having some income, attracting any special rate of tax, say for instance, any long-term capital gain income taxable @ 20%. In such cases, the marginal relief is being provided against the income taxable at special rate, to the extent of shortfall of the regular income from the basic exemption limit.

Similarly, marginal relief is also provided in cases of surcharge applicability in respect of incomes exceeding Rs. 50 lakhs and Rs. 1 crore respectively.

Thus, bringing about a similar provision of ‘Marginal Relief’ in respect of such taxpayers, having their annual gross total incomes of Rs. 7,00,001 and upto Rs. 7,29,000/-, and opting for the new tax regime, will rectify the above funny anomaly, such that, at the income levels between Rs. 7,00,005/- and upto Rs. 7,29,000/-, the income tax payable will get restricted to the amount of income which exceeds Rs. 7,00,000 only, and not higher than that.

Say for instance, in case of an individual having GTI of Rs. 7,10,000, the income tax payable will be restricted to Rs 10,000, only and not Rs. 27,040/-, as is being coming out currently, and the marginal relief of Rs. 17,040/- will be provided to such individual.

Thus, Dear FM, please remove this unintended funny anomaly, so that the employees are not faced with such paradoxical situation wherein per extra rupee of income earned by them, in excess of Rs 7 lakhs, costs them in thousands.

Note: This Article authored by our Founder Shri Mayank Mohanka, FCA, has also been published in Taxmann with the Citation [2023] 147 taxmann.com 230 (Article).