Home / Money / Personal Finance /  A case for marginal relief in the new tax regime

One of the proposals that has made Union budget 2023 very popular among the middle class is that individuals and Hindu undivided families (HUFs) opting for the new regime in FY 2023-24 and onwards, and having their annual gross total income (GTI) of upto 7 lakh, will not be required to pay any income tax, as they will be able to claim a rebate of 25,000 under Section 87A of the Income tax act.

However, what if one earns just 10 more than the annual GTI of 7 lakh, i.e., 7,00,010?

Consider this example: A is a salaried employee working with M/s ABC Pvt Ltd, drawing an annual salary of 750,010 in FY2023-24. So, his annual GTI, after opting for the new regime and claiming the allowable deduction in respect of standard deduction of 50,000, will come to 700,010.

Now, the annual GTI of A exceeds the threshold rebate limit, just by 10 only but he will not be able to claim the rebate of 25,000 under Section 87A, and his entire GTI of 700,010 will become taxable at the applicable slab rates in the new regime. The income tax liability of A in this case will come out at 26,000. Thus, just 10 of additional income in excess of 7 lakh, forces A to pay 26,000 as income tax.

Let us work out some more income levels to test this peculiar paradoxical situation, symbolizing the law of diminishing returns (see table).

Graphic: Mint
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Graphic: Mint

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 excess of 7 lakh, in the new tax regime, starts from an income level of 7,00,005 and it continues upto an income level of 7.29 lakh.

Note that income until 7,00,004 will be rounded off to 7 lakh.

In order to avoid this funny paradox, the finance ministry should bring about a suitable amendment in the new regime so as to provide marginal relief to such individuals and HUFs having their respective/ annual GTIs ranging from 700,005 to 7.29 lakh in FY 2023-24 and onwards.

Otherwise, A will have to ask his employer to reduce his salary so that income after standard deduction gets rounded off to 7 lakh to pay no amount as income tax.

Currently, marginal relief is being provided to taxpayers having their regular income below the basic exemption limit of 3 lakh in the new regime. Similarly, marginal relief is also provided in cases of surcharge applicability in respect of incomes exceeding 50 lakh and 1 crore, respectively.

Thus, bringing about a similar provision of marginal relief in respect of such taxpayers, having their annual gross total incomes of 700,005 and upto 7.29 lakh and opting for the new tax regime, will rectify the above paradoxical anomaly, such that, at the income levels between 7,00,005 and 7.29 lakh, the income tax payable will get restricted to the amount of income which exceeds 7 lakh only, and not higher than that.

Mayank Mohanka is the founder of TaxAaram India, and a partner at S M Mohanka & Associates

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