Income Tax Modifications from April 2023

Income Tax Modifications from April 2023

From 1 April 2023 (Assessment Year 2024-25), the Finance Act 2023 restructured Indian personal income tax at its foundation. The new tax regime under section 115BAC became the default for all individuals, HUFs, and AOPs — you now have to actively opt out, not opt in. The section 87A rebate ceiling rose to ₹7 lakh under the new regime, effectively making income up to ₹7 lakh tax-free. A 25% surcharge cap replaced the old 37% peak. These changes remain the structural backbone of personal tax planning through FY 2026-27, with subsequent Finance Acts layering further refinements on the same architecture.

Why April 2023 Was a Structural Break, Not a Routine Tweak

The Finance Act 2023 changes were not just rate adjustments. They inverted the regime-selection logic that had existed since Finance Act 2020 first introduced the optional new regime. Before April 2023, the old regime was the default and the new regime required an active opt-in through Form 10-IE. After April 2023, the new regime became the default and opting out requires affirmative action by the taxpayer.

This matters because inaction now has a different consequence. A salaried employee who does not submit a regime declaration to their employer, or who does not explicitly select the old regime on their ITR, is automatically assessed under the new regime. For someone who has invested heavily in PPF, paid LIC premiums, services a home loan, and claims HRA — all of which generate deductions only under the old regime — failing to opt out can mean paying significantly more tax than planned.

The April 2023 framework also raised the rebate ceiling, introduced marginal relief to smooth the rebate cliff, and extended the standard deduction to the new regime — all of which remain active in FY 2026-27. Understanding the 2023 baseline is essential for tracing why your tax liability has shifted year over year and for correctly processing updated returns for AY 2024-25.

Section 115BAC Amended: The New Regime Is Now Your Default

Who Is Affected

Section 115BAC, as amended by the Finance Act 2023, applies the new regime by default to:

• Individuals (resident and non-resident)
• Hindu Undivided Families (HUFs)
• Associations of Persons (AOPs) and Body of Individuals (BOIs) other than co-operative societies
• Artificial Juridical Persons

Firms (including LLPs), companies, and co-operative societies are not covered by this default-switch provision.

Salaried Employees: Annual Flexibility

If you are a salaried employee with no business income, you can switch between the old and new regime every year at the time of filing your ITR. However, you must also communicate your choice to your employer at the start of the financial year, because this determines how TDS is deducted from your salary under section 192.

The practical risk: if you declare the new regime to your employer but switch to the old regime at ITR filing, your employer would have under-deducted TDS. You will then owe the differential tax plus interest under sections 234B and 234C. Get your choice right early, or adjust it by March when employers typically allow a second declaration.

Business Income Earners: One-Time Opt-Out via Form 10-IEA

If you have income from business or profession, the rules are considerably stricter:

1. File Form 10-IEA on the Income Tax portal before your ITR due date to opt out of the new regime.
2. Once you opt out, you can switch back to the new regime only once in your lifetime.
3. If you switch back to the new regime, you permanently lose the ability to opt out to the old regime again.
4. Missing the Form 10-IEA deadline — typically 31 July for non-audit cases and 31 October for audit cases — means the new regime applies for the entire year by default with no remedy.

This is a consequential and potentially irreversible election. A proprietor who claims depreciation, business vehicle expenses, office rent, and a home loan interest deduction should run a careful multi-year projection before making this choice.

Revised Tax Slabs Under the New Regime (Finance Act 2023 Baseline, AY 2024-25)

Finance Act 2023 restructured the new-regime slab schedule, replacing the older seven-band table that started from ₹2.5 lakh:

These six bands were specifically designed to make the new regime more attractive at income levels between ₹9 lakh and ₹15 lakh, where the older new-regime rates were less competitive.

Important caveat for FY 2026-27: Finance Act 2025 introduced a further revised slab schedule with significantly higher nil-tax and lower-rate bands. The table above applies to AY 2024-25 and AY 2025-26. Verify the slabs as notified under the Finance Act applicable to AY 2027-28 before computing current-year liability. Do not carry forward 2023-vintage assumptions.

Section 87A Rebate: The ₹7 Lakh Zero-Tax Guarantee

How It Works

Under the new regime, section 87A was enhanced to provide a rebate of up to ₹25,000 for a resident individual whose total income does not exceed ₹7,00,000. Since the tax on ₹7 lakh under the 2023 new-regime slabs computes to exactly ₹25,000, the rebate eliminates the entire liability. Net tax payable = ₹0.

Under the old regime, the section 87A rebate remained at ₹12,500 for total income up to ₹5,00,000 — unchanged from earlier years.

The Marginal Relief Mechanism

Without marginal relief, a tax cliff would have emerged: someone earning ₹7,00,001 would face the full ₹25,000+ tax bill on just ₹1 of extra income. Parliament addressed this with a marginal relief provision:

> Rule: For income marginally above the rebate threshold, the excess tax payable over the rebate amount cannot exceed the excess income over ₹7 lakh.

Worked Example — Marginal Relief:

Priya earns ₹7,10,000 under the new regime (AY 2024-25, no deductions available except standard deduction — assume already applied):

• 0 – ₹3,00,000: Nil
• ₹3,00,001 – ₹6,00,000: ₹3,00,000 × 5% = ₹15,000
• ₹6,00,001 – ₹7,10,000: ₹1,10,000 × 10% = ₹11,000
• Gross tax = ₹26,000
• Section 87A rebate: Not available (income > ₹7L)
• Excess income over ₹7L = ₹10,000
• Marginal relief = ₹26,000 − ₹10,000 = ₹16,000 relief
• Tax after marginal relief = ₹26,000 − ₹16,000 = ₹10,000
• Add 4% cess: ₹400
• Total tax payable: ₹10,400

Without marginal relief, Priya would have paid ₹27,040. The mechanism ensures the additional tax on her ₹10,000 of extra income does not exceed ₹10,000 itself — the incremental effective tax rate on that slice is capped at 100%, preventing punitive outcomes.

Standard Deduction Extended to the New Regime

Before Finance Act 2023, the ₹50,000 standard deduction was available only to salaried taxpayers and pensioners under the old regime. The April 2023 amendment extended this deduction to the new regime as well — a change that removed one structural advantage the old regime had always held.

The family pension deduction of ₹15,000 — a flat relief available to those receiving family pension from a deceased employee's employer — was simultaneously extended to the new regime.

These extensions made the new regime materially more attractive for salaried filers, particularly those without significant section 80C or housing loan deductions.

Subsequent enhancement: Finance Act 2024 raised the standard deduction under the new regime to ₹75,000 (effective AY 2025-26 onwards) and the family pension deduction to ₹25,000. These enhanced figures continue into FY 2026-27, subject to any revision under the applicable Finance Act.

Surcharge Cap at 25%: The High-Income Relief

The Old-Regime Surcharge Problem

Under the old regime, surcharge on income tax escalates as follows:

• Income above ₹50 lakh: 10%
• Income above ₹1 crore: 15%
• Income above ₹2 crore: 25%
• Income above ₹5 crore: 37%

The 37% surcharge slab pushed the effective maximum marginal rate under the old regime to approximately 42.74% (30% base rate + 37% surcharge on that = ~41.1%, then 4% cess on top). This was among the highest personal income tax rates in major economies and was widely cited as a deterrent to high-earning individuals remaining tax-resident in India.

The New Regime Fix

Finance Act 2023 capped the surcharge under the new regime at 25%, abolishing the 37% band entirely for new-regime taxpayers. The lower surcharge tiers remain the same across both regimes.

Effective maximum marginal rate under the new regime:

• Base tax rate: 30%
• Surcharge: 25% of 30% = 7.5%
• Tax + surcharge: 37.5%
• Health and education cess: 4% of 37.5% = 1.5%
• Total: 39%

For a taxpayer with income of ₹6 crore, the difference between the old regime (42.74%) and the new regime (39%) on income above ₹5 crore translates to a saving of approximately ₹3.74 lakh per crore of excess income — entirely from the surcharge reduction alone.

One important carve-out: Surcharge on long-term capital gains (LTCG) under section 112A — gains on listed equity shares and equity mutual funds — was separately capped at 15% irrespective of the taxpayer's income level, effective from Finance Act 2022. This cap applies under both regimes.

Other Significant April 2023 Amendments

Online Gaming: Sections 194BA and 115BBJ

Finance Act 2023 comprehensively overhauled the taxation of online gaming:

• Section 115BBJ taxes net winnings from online games at a flat 30% — with no basic exemption, no deduction for entry fees paid, and no set-off for losses against winnings.
• Section 194BA requires online gaming platforms to deduct TDS at 30% on net winnings. Critically, the prior ₹10,000-per-game threshold was replaced: TDS now applies on net winnings during the financial year computed at each withdrawal or at year end, whichever is earlier.

If you play fantasy sports, online rummy, or any platform-based game for stakes, your net annual winnings appear in your AIS. Check the TDS credit under section 194BA and report the income under "Income from Other Sources" — not under the gaming head. Mismatching or omitting this triggers notices under section 143(1)(a).

Leave Encashment Exemption Raised to ₹25 Lakh

Under section 10(10AA), non-government employees are exempt from tax on leave encashment received at retirement. Before April 2023, this ceiling had been frozen at ₹3 lakh since 2002 — a figure rendered nearly meaningless by salary inflation over two decades. Finance Act 2023 raised it to ₹25 lakh.

The revised ceiling applies only to non-government employees. Government employees continue to receive full exemption on leave encashment at retirement. The ₹25 lakh is an aggregate lifetime limit across all employers — not per employer per year. Keep a running record if you have been employed at multiple organisations.

Offshore Gifts and Section 9(1)(viii)

Finance Act 2023 amended section 9(1)(viii) to tighten the rules on offshore gift transactions. Gifts received from non-residents by non-residents outside India in certain scenarios with Indian nexus can now fall within the Indian tax net. If you receive high-value gifts from non-resident friends or associates and have any India-connected factors (Indian source of funds, property interest, or future Indian residency), obtain a specific legal opinion before excluding these amounts from your return.

How the Framework Has Evolved Since April 2023

The 2023 changes were a foundation, not a final architecture. Each subsequent Finance Act has refined it:

Finance Act 2024 (AY 2025-26):

• Standard deduction under the new regime raised from ₹50,000 to ₹75,000
• Family pension deduction raised from ₹15,000 to ₹25,000
• New-regime slabs unchanged from 2023

Finance Act 2025 (AY 2026-27):

• New slab structure introduced under the new regime with wider nil-rate and low-rate bands
• Section 87A rebate threshold significantly enhanced under the new regime
• The effective zero-tax threshold rose materially above ₹7 lakh

For FY 2026-27 (AY 2027-28), verify current slab rates, the exact rebate threshold, and the applicable standard deduction against the Finance Act 2026 as notified. Do not assume AY 2024-25 numbers apply today.

Common Mistakes That Surface in Practice

1. Assuming the old regime is still the default Many taxpayers — and some employer payroll teams — continued operating under the pre-April 2023 assumption. If TDS was deducted under the new regime because no declaration was submitted, but the taxpayer needed the old regime to claim deductions, the ITR can fix the mismatch — but it means paying a lump-sum differential tax with interest under sections 234B and 234C.

2. Missing the Form 10-IEA deadline for business income earners There is no provision to file Form 10-IEA after the ITR due date. A proprietor or professional who misses 31 July (or 31 October for audit cases) cannot retrospectively opt into the old regime for that year. The loss of deductions — home loan interest, office depreciation, vehicle expenses — can be significant.

3. Not computing marginal relief Taxpayers with income just above ₹7 lakh (at the AY 2024-25 baseline) sometimes pay full tax without applying marginal relief. This is not automatically computed in all third-party tax calculation tools. Verify the computation manually if your taxable income falls between ₹7,00,001 and approximately ₹7,28,000 — the range where marginal relief is materially beneficial.

4. Claiming disallowed deductions under the new regime The new regime does not allow Chapter VIA deductions: no section 80C, 80D, 80E, 80G, 80TTA, or 80TTB. It also disallows HRA exemption under section 10(13A), LTA under section 10(5), and home loan interest on self-occupied property under section 24(b). Including these in a new-regime ITR invites a rectification notice under section 154 or a processing defect under section 143(1)(a).

5. Failing to reconcile AIS/TIS before filing The Annual Information Statement (AIS) on the Income Tax portal now captures TDS on gaming winnings (section 194BA), salary TDS with regime details (section 192), interest income, dividend income, and high-value transactions. Filing without reconciling means you risk discrepancies that the Central Processing Centre (CPC) flags automatically.

6. Treating the rebate as available against LTCG on equity Whether the section 87A rebate under the new regime is available against tax on long-term capital gains under section 112A (equity shares and equity mutual funds) has been subject to interpretation. The Income Tax portal's computation engine at various points has restricted this. Verify the current official position before assuming the rebate offsets LTCG tax — do not rely on older tax software defaults.

Worked Example: Regime Comparison for a Salaried Employee

Profile: Ravi, salaried, gross salary ₹12,00,000 per year. Qualifies for HRA exemption of ₹2,40,000. Invests ₹1,50,000 under section 80C. Pays ₹25,000 in health insurance premium (section 80D). Home loan interest on self-occupied property: ₹2,00,000.

Old Regime — AY 2024-25:

New Regime — AY 2024-25:

Verdict: The old regime saves Ravi approximately ₹1,26,360 in AY 2024-25. He should submit his old-regime declaration to his employer at the year's start and select the old regime explicitly when filing the ITR. The new regime would only be better for Ravi if he gave up his home loan or reduced his investment portfolio significantly.

This example makes the key pattern visible: taxpayers with home loans, active 80C investment, and qualifying HRA typically save more under the old regime. The new regime becomes progressively more attractive as income rises above ₹15 lakh and available deductions shrink relative to income.

Step-by-Step: Locking Your Regime for FY 2026-27

1. List every deduction you can legitimately claim under the old regime: HRA, LTA, home loan interest, section 80C investments, 80D premiums, 80E loan interest, 80G donations. Compute the total.
2. Compute old-regime taxable income: Gross salary minus standard deduction (₹75,000 for FY 2026-27 under new regime; old-regime standard deduction remains as notified) minus eligible exemptions and Chapter VIA deductions.
3. Compute new-regime taxable income: Gross salary minus standard deduction (₹75,000 as per Finance Act 2024, verify for FY 2026-27). No further deductions.
4. Apply current-year slabs and rebate: Use the slab rates as notified for AY 2027-28. Apply section 87A rebate at the current threshold. Compute marginal relief if income sits just above the rebate ceiling.
5. Add surcharge and cess: Surcharge capped at 25% under the new regime. Add 4% health and education cess on tax plus surcharge.
6. Compare the two net figures and choose.
7. For salaried employees: Submit your regime declaration to your employer before their internal deadline (typically April–May). Many employers require the declaration in Form 12BAA. You can revise at ITR filing.
8. For business income earners: File Form 10-IEA on the Income Tax portal (incometax.gov.in) before 31 July 2026 (non-audit) or 31 October 2026 (audit cases) if you want the old regime.
9. Download and reconcile your AIS: Go to incometax.gov.in → Login → AIS tab. Verify TDS credits, bank interest, dividends, and any gaming TDS under 194BA. Raise feedback on mismatches before filing.
10. File ITR by the due date: 31 July 2026 for most individuals (AY 2027-28). Late filing beyond this date attracts a fee of ₹5,000 under section 234F (₹1,000 if total income does not exceed ₹5 lakh), plus interest on tax due under sections 234A, 234B, and 234C.

Key Takeaways

• The new tax regime has been the default since AY 2024-25. Doing nothing = new regime. If your deductions are substantial, doing nothing costs money.
• Section 87A rebate at ₹7 lakh (AY 2024-25 baseline) delivers zero tax for most mid-income salaried filers under the new regime — but this threshold has since been enhanced by Finance Act 2025; verify the current-year figure.
• Marginal relief prevents a tax cliff — if income is just above the rebate threshold, the incremental tax cannot exceed the incremental income.
• Standard deduction of ₹75,000 under the new regime (from AY 2025-26) materially narrows the tax gap for salaried employees who lack other deductions.
• The 25% surcharge cap under the new regime brings the maximum marginal rate down to ~39%, versus ~42.74% under the old regime — a real difference for income above ₹5 crore.
• Business income earners must file Form 10-IEA before the ITR due date to preserve the old regime — this is not recoverable if missed.
• Always run a regime comparison and reconcile your AIS before filing. A ten-minute calculation in March or April saves unwanted notices and avoids leaving thousands of rupees in refund claims unfiled.