No adjustment to pay scales following budget, according to experts

Although the standard deduction and income tax rebate ceiling under the new tax law have increased as of April 1, companies are not expected to alter the pay structure.

Both the old and the new tax systems now exempt anyone with incomes up to Rs 5 lakh from paying income tax.
The cap on the amount of income tax rebates allowed under the new tax system was raised to Rs 7 lakh by Finance Minister Nirmala Sitharaman during her Budget statement on February 1. As a result, beginning on April 1, you won’t be required to pay taxes on income up to Rs 7 lakh under the new tax system.

Both the old and the new tax systems now exempt anyone with incomes up to Rs 5 lakh from paying income tax. There has been a lot of conjecture regarding adjustments to employee compensation across industries since the tax rebate maximum was increased.

However, industry analysts have downplayed such fears.

“I do not believe enterprises would change employee compensation structures as a result of the tax rebate hike,” Balasubramanian A, VP and Business Head of staffing firm TeamLease Services.

For example, he stated that a person earning Rs 7 lakh per year would now pay no tax, as opposed to Rs 32,000 under the previous regime.
“The entire objective of increasing the rebate is to put more money in the hands of taxpayers,” Balasubramanian explained.

As a consequence, the maximum personal income tax rate would be reduced from 42.74 percent to 39 percent. The tax exemption ceiling for non-government paid employees on leave encashment on retirement has been raised from Rs 3 lakh to Rs 25 lakh.

There is no change.

Under the new tax regime, the benefit of standard deduction has been extended to salaried workers and seniors, including family pensioners. Salaried people and seniors can take a Rs 50,000 standard deduction, while pensioners can take a Rs 15,000 reduction. A salaried worker earning Rs 15.5 lakh or more will benefit from the increased ceiling by Rs 52,500.

Furthermore, in the new tax system, the highest surcharge rate for personal income tax has been decreased from 37 percent to 25 percent for income beyond Rs 2 crore.

“These changes may not necessarily necessitate enterprises to adjust their wage structures, given the tax slabs have changed and not the advantages around the salary components. In summary, the structures will remain unchanged, while the take-home pay will rise,” stated Kunal Girap, Co-Founder and Director of WalkWater Talent Advisors.

A higher take-home pay

According to Santhosh Nair, Director & COO, CIEL HR, only the new tax system was changed in the 2023 budget, leaving the current tax regime untouched. He did note that the new tax system had fewer exemptions and deductions than the old one.

“The choice between the two tax regimes is determined by employee investment decisions. “It is not expected that the wage structure changes would result in significant variations for employees,” he continued.

Indeed, with the latest reform, industry analysts believe companies will need to maintain the current compensation structure while giving employees the choice to select between the two regimes.

“As a result, even after the modifications in the new tax regime are implemented, each employee would need to examine the tax liabilities under both regimes and decide on the regime that is favourable to the employee,” said Akhil Chandana, Partner at accounting firm Grant Thornton Bharat.