ITR Filing: How To Choose Between New And Old Tax Regime?

Every year, as the ITR filing deadline approaches, taxpayers wonder whether they can switch between the new and old tax regimes while filing their Income Tax Return (ITR). The new tax regime, introduced in Budget 2020, was later revised in Budget 2023, offering taxpayers greater flexibility in choosing their preferred tax structure. So, can you make the switch while filing your returns? Let’s break it down.

The old tax regime refers to the traditional system of income taxation. This system allows taxpayers to claim various deductions, exemptions and allowances to lower their taxable income.

• Taxpayers can reduce their taxable income by claiming deductions on investments (e.g., PPF, EPF, ELSS), insurance premiums, housing loan interest and other specified expenses.

• This tax regime encourages long-term financial planning by providing tax benefits on savings and investments.

• It requires taxpayers to calculate and claim deductions, making tax filing more complex compared to the new regime.

• Income up to Rs 2.5 lakh: No tax

• Income from Rs 2.5 lakh to Rs 5 lakh: 5%

• Income from Rs 5 lakh to Rs 10 lakh: 20%

• Income above Rs 10 lakh: 30%

The new tax regime was introduced in Budget 2020 as an alternative to the old tax regime. It offers lower tax rates but eliminates most deductions and exemptions, except for benefits under Sections 80CCD(2) and 80JJA (applicable to business income).

• Lower tax rates compared to the old tax regime.

• No deductions or exemptions for investments, insurance, or housing loans.

• Simplifies tax calculations and reduces compliance burden.

• Available for individual taxpayers and Hindu Undivided Families (HUFs).

• The government continues to introduce changes to make it more attractive.

• Up to Rs 4 lakh: No tax

• Rs 4 lakh to Rs 8 lakh: 5%

• Rs 8 lakh to Rs 12 lakh: 10%

• Rs 12 lakh to Rs 16 lakh: 15%

• Rs 16 lakh to Rs 20 lakh: 20%

• Rs 20 lakh to Rs 24 lakh: 25%

• Rs 24 lakh and above: 30%

Higher tax rebate limit: Section 87A rebate limit increased from Rs 7 lakh to Rs 12 lakh. Salaried people can claim a Rs 75,000 standard deduction, making annual incomes up to Rs 12.75 lakh tax-free.

Extended time for filing updated returns (ITR-U)

Taxpayers now have 4 years (instead of the earlier 2) to update their Income Tax Returns.

Implementation date: These tax reforms take effect from Apr. 1, 2025 (for FY 2025-26).

• The new tax regime is the default regime, meaning if you don’t actively choose, your taxes will be calculated under this system.

• Taxpayers can opt out of the new regime before the ITR filing deadline for the relevant Assessment Year (AY).

• Salaried people can switch between tax regimes every year while filing their ITR.

• Business owners and professionals can switch between the regimes only once in a lifetime.

The choice between the old tax regime and the new tax regime depends on individual financial goals and tax-saving preferences.

• If you claim multiple deductions and exemptions (like investments, insurance, home loan interest), the old tax regime may be more beneficial.

• If you prefer lower tax rates with minimal paperwork, the new tax regime offers a simplified approach.

Salaried people can estimate their tax liability under both regimes using the income tax calculator on the Income Tax Portal. A comparative evaluation of both regimes will help you understand the most tax-efficient choice based on income, investments and savings strategy.