Several salaried employees still seem to be confused about tax regime selection. As only a few days are left to intimate the tax regime choice to employers, salaried individuals should go for the old tax regime in case they still have some confusion.
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According to CBDT, it is necessary for employees to intimate their tax regime choice to employers, failing which the latter will deduct taxes as per the new regime rates. Accordingly, employers have sent out emails to employees seeking details of the latter’s preferred tax regime.
It is important for employees to understand that their tax regime choice shared with the employers will help the latter in deducting applicable withholding taxes on salary as per applicable rates. So if an employee opts for the new tax regime, the employer will deduct taxes from the salary as per the new tax regime rates. In this case, however, the employer will not consider various deductions and exemptions allowed under the old regime. However, if an employee opts for the old regime, then the employer will deduct taxes after taking into account various deductions and exemptions allowed to the employee.
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Some of the common exemptions allowed to employees include HRA, LTA, and Standard Deduction. The employers also deduct some amount for payments towards the Employees Provident Fund account of the employee, which qualifies for deduction under Section 80C. Apart from these, the employee can also claim deductions up to Rs 2 lakh on home loan interest payments, up to Rs 50,000 on payments towards the NPS account and much more (See details here)
As most salaried employees enjoy tax deductions and exemptions, it will be advisable for them to opt for the old regime so that their monthly cash flow remains high. In case, the employee later finds that more taxes can be saved under the New Regime, s/he can always change the tax regime choice at the time of filing their respective Income Tax Returns. (Also read: Can you change tax regime)
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“Budget 2023 came up with several amendments making the new tax regime more attractive and the default tax regime. This made taxpayers more confused about which regime to choose from. A taxpayer must decide which regime (old/ new) to choose at the beginning of the financial year so that the same can be communicated to the employer and TDS and other deductions can be provided accordingly,” says Abhishek Soni, co-founder and CEO of Tax2win.
Deciding Factors
According to Soni, the following factors can help an employee in selecting the tax regime:
Income Level
Under the new tax regime, the tax rates are lower than the old tax regime. The new tax regime may be more beneficial if you have a higher income. As per budget 2023, an individual with Rs 9 lakh annual income will have to pay Rs 45,000 as tax, which is 5% of the taxable income. This represents a reduction of Rs 47,500 from the Rs 92,500 tax liability that the same individual would have had under the old tax regime.
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Similarly, an individual with Rs 15 lakh annual income will have to pay a tax of Rs 1.5 lakh under the new tax rates introduced under budget 2023 for the new tax regime, which is a reduction from the earlier tax liability of Rs 1.87 lakh calculated as per new tax regime rates before budget 2023. The reduction in tax liability is due to the lower tax rates under the new tax regime, which has revised tax slabs and rates to provide relief to taxpayers.
Investment Goals
“It is always advised to evaluate before selecting which tax regime to choose. If you are flexible with your investments and looking forward to not investing in tax-saving instruments, the new tax regime suits you. However, If you have investment goals such as retirement savings or building a corpus for a long-term goal, the old tax regime may be more beneficial as it offers deductions for contributions to various investment instruments,” says Soni.
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Deductions and Exemptions
Under the old tax regime, you can avail of a deduction of Rs 1.5 lakh under Section 80C and Rs 2 lakh under Section 24(b) on the interest amount for self-occupied property. This means a straight deduction of Rs 3.5 lakh can be availed under the old tax regime, while the new tax regime does not offer such deductions and exemptions.
Simplicity
The new tax regime documentation process is simple, it eliminates the need to calculate and claim deductions and exemptions, which helps taxpayers to file the ITR quickly.
Old vs New Tax Regime
To make it easier for employees to decide the best tax regime, the following comparison will also help:
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Old Tax Regime
- Offers more deductions and exemptions, which can lower taxable income and tax liability.
- Taxpayers can claim deductions under Sections 80C, 80D, 80E, and other sections to reduce their taxable income.
- The tax rates and slabs are different from the new tax regime.
- Old Tax regime promotes savings for the future.
New Tax Regime
- Lower tax rates for certain income slabs can result in lower tax liability for some taxpayers.
- Only allows for a few of the deductions and exemptions available in the old tax regime.
- It offers a simplified tax structure without the need to calculate deductions and exemptions, making it easier for some taxpayers.
- As there are no deductions and no investments to be made, hand income is more when opting for a new tax regime.
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“The new tax regime may be better for individuals who do not have many deductions and exemptions to claim or prefer a simpler tax structure. However, the old tax regime may result in lower tax liability for individuals with significant deductions and exemptions. Salaried individuals (having income other than income from business and profession) can change their choice of the regime under the old or new tax regime every year,” says Soni.
