Choosing your tax regime

Here are the factors a taxpayer needs to weigh before deciding between the new and old tax regimes

We have entered the tax filing season for incomes earned in the financial year ending March 2024. At the same time, it is also that time of the year when employers will ask you to choose between the old tax regime and the new one for the new financial year beginning April 2024.

The new tax regime has become the default regime from FY24 onwards. However, assessees can choose the regime that is favourable to them. You can indicate your choice to the employer at the beginning of a financial year and/or also exercise your choice at the time of filing the return after the year has ended.

Those without any business income such as the salaried class have the option to choose the regime for each financial year.

The choice of tax regime, whether new or old, is an important decision for taxpayers as it directly impacts investment decisions, financial goals, and tax planning strategy. One should choose the tax regime after thorough evaluation, comparison, and consideration of various factors. Some of the key factors to be kept in mind by taxpayers are as follows:

TAX RATES AND ELIGIBLE DEDUCTIONS AND EXEMPTIONS

The new tax regime provides for lower tax rates compared to the old but with limited tax deductions or exemptions. Taxpayers opting for new tax regime will have to forgo certain specified deductions and exemptions. For salaried taxpayers, certain exemptions/deductions are not available, such as house rent allowance (HRA), leave travel allowance/ concession (LTA/LTC), interest on housing loan for selfoccupied property, Chapter VIA deductions, such as life insurance premium, employee’s contribution to provident fund, mediclaim premium, etc. Taxpayers will have to compare the tax rates as well as the eligible exemptions or deductions available under each of the tax regimes to make a choice.

LEVEL OF INCOME

The new tax regime provides for a higher threshold of maximum amount not chargeable to tax, which is ₹3,00,000 as compared to ₹2,50,000 in the old tax regime. Further, the new regime provides for a higher income threshold of ₹7,00,000 for the purpose of calculating rebate under section 87A of the Income-tax Act, 1961 compared to income threshold of ₹5,00,000 in the old regime.

Also, the new tax regime has maximum surcharge rate of 25 per cent for total income exceeding ₹5 crore, which is 37 per cent in the old regime.

All the above factors need to be considered by a taxpayer before making a choice between new and old tax regimes.

For instance, taxpayers having taxable income up to ₹7,00,000 will not have to pay any tax under the newregime. Similarly, taxpayers with taxable income of ₹5 crore or more will benefit under the new regime due to lower surcharge of 25 per cent compared to 37 per cent under the old regime.

INVESTMENT CHOICES

Decision on tax regime would also depend on the investment choices made by the taxpayer and how those investments are eligible for tax benefits under each tax regime.

For example, investments in NPS by a taxpayer (not employer contribution) are eligible for additional deduction of ₹50,000 under the old tax regime whereas it is not available under the new regime.

Just to take an example, let us consider an individual with a salary income of ₹15,50,000 with various deductions such as house property interest and principal exemptions, deductions under section 80C, 80D.

As per the calculations in the accompanying table, it will benefit the individual more to choose the old tax regime if the total eligible deduction to be claimed in the tax return is more than ₹3,75,000.

POINTS TO NOTE

Irrespective of the regime opted for, the taxpayer is also required to maintain adequate documentation with regard to the various heads of income reported, credit claimed with respect to TDS or TCS in the tax return. A taxpayer opting for old regime will have to maintain additional documentation with respect to exemptions and deductions claimed in the tax return.

Maintenance of appropriate documentation becomes more important in case the tax return is selected for scrutiny by the authorities in the future. In case of a tax scrutiny, taxpayer may be required to produce relevant documents/ proofs substantiating the types of income reported, deductions/exemptions claimed in the return.