The Union Budget 2023 is here. HR and payroll professionals must update their enterprise processes to incorporate the newly declared income-tax regulations. This budget brings in significant changes that affect payroll calculations for most employees. A large portion of the workforce may also shift to the new tax regime. Employees expect a smooth, hassle-free transition with accurate payouts.
So here are the fundamental changes you must prepare for.
How Will Budget 2023 Affect Payroll Processing?
HROne has already compiled a comprehensive list of the Union budget 2023 highlights. Below is a deep dive into points that specifically affect the payroll calculations in the next financial year.
1. Change In Default Tax Regime
The government has made a definitive push towards the new tax regime in the Union Budget of 2023. The new tax regime, introduced in the 2020 Budget, is known as the 'Simplified Tax regime.'
It offers hassle-free tax compliance and reduced tax rates if the taxpayer foregoes some deductions and exemptions. However, according to a report by Clear (formerly Cleartax), an online tax service, only 10% of the taxpayers who filed returns through the portal opted for the new regime last year.
To increase adoption, the government has made the new tax regime as the default tax regime. It implies that if a taxpayer fails to opt for the old regime within a specified time limit, the tax liability will automatically compute per the new regime.
2. New Income Tax Slabs
The government has sweetened the deal for taxpayers opting for the new regime by rationalizing the number of tax slabs and reducing the tax rates. The number has been decreased from six to five, eliminating the tax bracket of 25%, as follows:
a) Rs 0 to Rs 3 lakh - 0% tax
b) Rs 3 lakh to 6 lakh - 5% tax
c) Rs 6 lakh to 9 lakh - 10% tax
d) Rs 9 lakh to Rs 12 lakh - 15% tax
e) Rs 12 lakh to Rs 15 lakh - 20% tax
f) Above Rs 15 lakh above - 30% tax
As more taxpayers opt for the new regime, your payroll software must be capable of calculating tax liabilities based on both regimes per employee preference. It is also important to note that salaried individuals can switch between the tax regimes in the future as they wish.
3. Increase In Tax Exemption And Rebate Limits
The government has increased the basic exemption limit from Rs 2.5 lakh to Rs 3 lakh in the new tax regime. Additionally, the rebate under section 87A has increased from Rs 5 lakh to Rs 7 lakh. It is good news for individuals earning less than Rs 7 lakh, as their income would now be tax-free.
4. More Deductions In The Proposed New Tax Regime
The finance minister proposed in the Union Budget that salaried individuals will get a standard deduction of Rs 50,000 if they opt for the New Tax Regime.
Additionally, if you are contributing to your employees' NPS accounts, your employees can claim a deduction for the same. Private sector employees can claim a maximum deduction of 10% of their salaries and government employees are allowed up to 14% of their salary.
Payroll software generally applies deductions only for employees choosing the old tax regime currently. You must ensure the new tax regime deductions are available in your payroll apps from next year onwards.
5. Decrease In Surcharge Rate
Currently, the highest tax rate in India is 42.74%. It applies to individuals with an income of more than Rs 5 crore. The Union budget proposed reducing the tax surcharge rate on income above Rs 5 crore to 25% from 37%. It will reduce the maximum tax rate to 39%. This move will affect the payroll calculations for top management executives.
6. Increase In Leave Encashment Limit
The limit of Rs 3 lakh for tax exemption on leave encashment on the retirement of private salaried employees has increased to Rs 25 lakh in Budget 2023.
Employees may opt for the new regime vis-à-vis the old regime depending on many factors such as whether they are availing housing loan benefits, whether they invest in eligible instruments such as 80C, financial liquidity, long-term and short-term financial goals, and emergency funding requirements, among others.
Payroll Software For Adapting To New Tax Rules
The Union Budget 2023 highlights the need for agile enterprise payroll processes that can be configured, deployed, and tested quickly. The following are some key points to keep in mind while selecting payroll software.
1. Automatic Tax Updates
Cloud-based payroll software must provide automated updates to incorporate the latest tax slabs, rates, deductions, exemptions, and tax deadlines. These updates must be auto-installed with relevant instructions and help documentation if any.
2. Out-Of-The-Box Tax Reports
Your payroll software must be able to generate statutory reports, payslips, and challans like TDS deposit challans. These reports must be per the latest tax form structures and compatible with government portals.
3. Seamless Integration With Other HR Modules
Per the Deloitte Global Payroll Benchmarking Survey, 2020, missed or inaccurate HR updates are the second most common reason accounting for 20% of off-cycle payroll payouts.
It makes sense to opt for a full-fledged HR Management system like HROne rather than standalone payroll apps. It offers a centralized HR database and ensures your employee master list and other HR data are updated in your payroll system automatically for accurate payroll calculations.
4. Self-Service Options
Employees must be able to remotely upload their investment proofs for claiming tax exemptions. They must also be able to download their payslip and tax forms (like Form 16), check tax calculations, and raise requests for clarifications as required.
Algorithmic payroll calculations with easy-to-use self-service options offered by HROne cut payroll processing time to less than a day while ensuring 100% statutory compliance with the latest tax guidelines.
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