As the new financial year 2023-24 has just commenced, it is time for salaried individuals to make the important decision of selecting the taxation regime in which their income will be taxed. In the recent Budget 2023, Finance Minister Nirmala Sitharaman presented certain changes in the new tax regime, such as changes in tax slabs, rates, and more.
Now, it is up to the individuals whether they want to stick to the old tax regime or switch to the new one, which will be considered the default regime from now on. Therefore, in order to make the right decision, it is important to understand the different tax regimes and their implications.
In this article, we aim to provide a comprehensive guide to help you choose the best-suited tax regime.
What is the basic difference between the old and new tax regimes?
The major difference between the old and new tax regimes is the income tax slab rates and the ability to claim exemptions and deductions. Under the old tax regime, taxpayers can claim exemptions and deductions on investments and expenses such as house rent allowance, medical insurance, etc. However, under the new tax regime, most of these exemptions and deductions have been removed and replaced with a reduced income tax slab rate.
Additionally, if your taxable income is less than ₹7 lakh in the financial year 2023-24, you don't have to pay any taxes when you opt for the new tax regime. That's because the Section 87A rebate has been increased for incomes of up to ₹7 lakh.
What are the tax slab rates under the new tax regime?
As per the slabs announced in the Budget 2023 by the finance minister, the tax rates for FY 23-24 under the new tax regime stand as follows-
NIL for income up to ₹3 lakh
5% for income between ₹3 lakh and ₹6 lakh
10% for income between ₹6 lakh and ₹9 lakh
15% for income between ₹9 lakh and ₹12 lakh
20% for income between ₹12 lakh and ₹15 lakh
30% for income over ₹15 lakh
Are all the exemptions removed from the new tax regime?
Under the revised new tax regime, an individual will not be able to avail of the same tax deductions and exemptions that were available under the old regime. This includes deductions such as House Rent Allowance (HRA) tax exemption, Leave Travel Allowance (LTA) tax exemption, and deductions up to a limit of ₹1.5 lakh under Section 80C. However, there is one crucial benefit in the new regime - a standard deduction of ₹50,000. This is applicable to both the old and new tax regimes.
What will happen if you don’t choose a tax regime of your choice?
The Central Board of Direct Taxes (CBDT) recently issued a circular announcing that in the absence of any employee's declaration of their tax regime choice, employers will have to deduct taxes as per the new tax regime.
This means that unless the employee opts for the old tax system, the employer will automatically consider the tax slabs and rates under the new system while computing the tax liability. This change is being implemented to ensure that taxpayers are aware of the new tax regime and its implications and to ease the tax filing process for everyone.
Can you switch the tax regime in the middle of a financial year?
As a salaried individual, you need to choose between the old and new tax regime every financial year. Your employer will deduct taxes on your salary based on the tax regime option you communicate in April. This regime cannot be changed until the end of the financial year.
However, when you file your income tax return, you can choose a different tax regime. Do note that there are certain exemptions that cannot be claimed at the time of filing the ITR, so it's important to consider those when you make your selection.
Can you change the tax regime at the beginning of every financial year?
If you are a salaried individual or a pensioner, you have the opportunity to switch between the new and old tax regimes at your convenience every financial year, as long as you don’t have any business income. This is according to the income tax laws that have been set forth by the government.
It’s quite advantageous for those who are not associated with any business, as they can choose whichever regime is beneficial for them. On the other hand, if you are running a business, you will not be able to switch between the two regimes.
How to choose between the old and new tax regimes?
When it comes to deciding between the old and new tax regimes, it is important to consider the exemptions and deductions that can be claimed in the old tax regime. After subtracting all the eligible deductions, an individual can calculate their net taxable income.
This should then be compared to the tax liability under the new tax regime. Whichever option has the lower tax liability should be chosen and communicated to the employer to deduct TDS from the salary. This way, an individual can ensure they are paying the least amount of tax possible.