Budget 2023 has announced that the Tax Payers opting for New Tax Regime and earning less than Rs 7 lakh will have to pay No Taxes.
But there are a few things to note about this annoucnement:
- Income Tax will be Nil for those who Opt for New Tax Regime AND earn less than Rs 7 lakh
- If you opt for the old tax regime, then you will not have to pay taxes only if you earn less than Rs 5 lakh. Do not be confused. The Rs 7 lakh tax-free income limit is for those under the new tax regime.
Individuals with taxable income of up to Rs 7 lakh and they opt for the new tax regime, will get full tax rebate under section 87A. What this means is that if your net taxable income is up to Rs 7 lakh under new regime, then you don’t need to pay any taxes. However, if the net taxable income is above Rs 7 lakh, then the rebate under Section 87A cannot be availed.
Here is simple example to show the working
How Income Tax is Zero (NIL) on Rs 7 lakh income under New Regime (2023)?
Suppose, your net taxable income is Rs 7 lakh.
As per the latest new tax slabs, calculated normal tax liability is as follows:
- 0 to Rs 3 lakh – 0% – Nil
- Rs 3 lakh to Rs 6 lakh – 5% of Rs 3 lakh – Rs 15,000
- Rs 6 lakh to Rs 7 lakh – 10% of Rs 1 lakh – Rs 10,000
So the total tax = 0 + Rs 15,000 + Rs 10,000 = Rs 25,000
But, the revised Section 87A limit now offers a full rebate for taxable income of up to Rs 7 lakh under the new tax regime.
Result
Tax of Rs 25,000 – Rebate of Rs 25,000 = Zero Tax
So you can say that the so called zero tax is applicable only for those whose taxable income is Rs 7 lakh or less under the new tax regime.
But what happens in case taxable income is more than Rs 7 lakh?
Let’s see…
Income Tax on income above Rs 7 lakh in New Tax Regime (2023)
If you wish to calculate income tax on your net taxable income above Rs 7 lakh, then let’s take an example to understand it.
Suppose, your total income is Rs 8 lakh.
As per the tax slabs, the calculated normal tax liability is as follows:
- 0 to Rs 3 lakh – 0% – Nil
- Rs 3 lakh to Rs 6 lakh – 5% of Rs 3 lakh – Rs 15,000
- Rs 6 lakh to Rs 8 lakh – 10% of Rs 2 lakh – Rs 20,000
So the total tax = 0 + Rs 15,000 + Rs 20,000 = Rs 35,000
But, the revised Section 87A limit is applicable for the new regime only for those who earn less than Rs 7 lakh. And in our example, that limit is crossed as the income is more than Rs 7 lakh
Since your taxable income is Rs 8 lakh, which is not less than Rs 7 lakh in the new regime, you are not eligible for the rebate under Section 87A of the Income Tax Act. So your tax liability remains at Rs 35,000 and you have to pay the full amount. Sorry! But you can still be wise about tax planning by giving priority to your investment planning.
It makes sense to repeat that the rebate in new regime is available only if taxable income is Rs 7 lakh or less. Not if it’s above it.
There are no changes to the tax-free income limit of Rs 5 lakh under old tax regime.
Note – Here is how the old vs new tax regimes compare after the changes announced in Budget 2023.
Individuals with taxable income of up to Rs 5 lakh will get the full tax rebate under section 87A. This effectively means that they will not be required to pay any taxes. However, for those whose net taxable income is above Rs 5 lakh, there is not tax rebate that they can avail.
I hope this article clarifies your doubts about how income of Rs 7 lakh is tax free under new tax regime and what is the zero percent (0%) income tax slab for those earning less thatn Rs 7 lakh.