The new tax regime was introduced by the Finance Minister in the Union Budget 2020. This regime, also known as the simplified tax regime, offers lower tax rates with fewer deductions and exemptions, compared to the old tax regime. The income tax provisions allow an individual to choose either of the two regimes. The choice can be made every year except where an individual has a business or a profession.
Read More: How to Link PAN with Aadhaar by May 31 to Avoid Income Tax Notice? Know Latest CBDT Guidelines
Transitioning from the old tax regime to the new one primarily hinges on key factors such as income level, potential tax savings, deductions, overall tax planning, among others. Under the new regime, lower tax rates can translate to reduced tax liabilities for many taxpayers; however, the trade-off lies in the elimination or reduction of various deductions and exemptions that are available under the old regime.
“To evaluate whether to switch to the new tax regime, it is important to assess potential tax savings by comparing tax liabilities under both regimes, factoring in income levels, deductions, exemptions and applicable tax rates. Those who stand to benefit from lower tax rates in the new regime may find it advantageous to make the switch. Illustratively, resident salaried individuals with gross income up to INR 7.5 lakh have no tax liability under the new tax regime. Furthermore, employees earning more than INR 5 crore may benefit under the new regime due to lower surcharge,” says Divya Baweja, Partner, Deloitte India.
It is also important to evaluate the impact of deductions and exemptions available under each regime. While the old regime offers a plethora of deductions and exemptions, the new regime offers fewer options.
Read More: ITR 2024-25: How you can save more tax with NPS
Common exemptions and deductions available to salaried individuals such as House Rent Allowance, Leave Travel Allowance, 80C, 80D (Medical Insurance), etc., are not available under the new regime. However, standard deduction for salaried taxpayers, deduction for employer’s contribution to the National Pension Scheme are available under both the regimes.
“Individuals with income from business and profession can opt for the old regime, and it will apply for all future years. However, switching back to the new regime is allowed only once in a lifetime. Once reverted, they become ineligible to opt for the old regime for any future years (unless they cease to have business income),” informs Baweja.
It may also be noted that from the Financial Year 2023-24, the new regime is the default regime; thus, unless opted out while filing the tax return, the Income Tax System will apply tax rates under the new regime and ignore all deductions and exemptions not available under the new regime while processing the return.
Read More: Planning To File ITR On Your Own? Salaried Taxpayers Need To Know These Things
In summary, individuals need to make an informed decision on whether transitioning to the new tax regime aligns with their financial goals and optimizes their tax situation before opting for a regime.
