Last Updated on February 2, 2023 at 8:00 am
Budget 2023 has introduced a tax rebate in the new tax regime, and with this, the effective tax-free limit is now Rs. 7 lakhs. Here is how this works. We use the New Tax Regime vs Old Tax Regime Calculator for this illustration.
Consider first the old tax regime. For a salaried tax-payer with an income of Rs. 7 lakhs a year and section 80C savings of Rs. 1.5 L (at least theoretically!), the effective taxable income is Rs. 5 lakhs since the standard deduction is Rs. 50,000.
The tax (before a 4% cess) is Rs. 12,500. This amount is eligible for a rebate under section 87A. Therfore the tax is Rs. 12,500 minus Rs. 12,500 = zero. Thus in the old tax regime, the effective tax-free limit is five lakhs because of this rebate.
Similarly, a tax rebate is applicable in the new tax regime from 1st April 2023 up to Rs. 7 lakhs. So if the taxable income is Rs. 7.5 lakhs, with a standard deduction of Rs. 50,000, the effective taxable salary is Rs 7 lakhs. The tax applicable is Rs. 25,000. This amount is available as a rebate; Hence, Rs. 7 lakhs is the new tax-free limit in the new tax regime from 1st April 2023.
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Note the maximum rebate is Rs. 25,000 and is only applicable if the taxable income is Rs. 7 lakhs or less.
Please note that the tax is zero if your taxable income is, for example, Rs. 6 lakhs. However, you still need to file income tax returns and validate the 87A rebate.