With the income tax return (ITR) deadline arriving soon, taxpayers in India continue to evaluate switching between the old and new tax regimes to optimise their savings.
The old regime allows multiple deductions and exemptions such as HRA, insurance and investments, while the new regime offers lower tax rates but removes most deductions. This has led to a lot of confusion about how to pick the most suitable option.
Last year, the government already announced that income up to Rs 12 lakh will be tax-free from FY2025-26 in the new regime due to higher rebates. For salaried taxpayers, the limit is Rs 12.75 lakh due to standard deduction facility. As a result, it has become a no-brainer that people earning up to Rs 12 lakh can easily opt for the simplified new tax regime.
However, those with higher income levels may feel the need to evaluate the right option based on their income and claimed deductions on various expenses. But before deciding, here's what they must consider:
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What Not To Miss While Switching Tax Regime?
1. The new tax regime is the default tax system. It offers lower income tax rates but allows only limited deductions and exemptions. However, most taxpayers still have the option to choose the old tax regime.
2. Employees must inform their employer about their chosen tax regime during the financial year. If no intimation is given, it is assumed that the employee continues under the default tax regime.
3. Individuals, HUFs, AOPs, BOIs and artificial juridical persons with business or professional income cannot freely switch between tax regimes every year. Once they opt out of the new regime, switching back is limited to one-time choice and may become permanent.
4. If you have income up to Rs 12 lakh, you can easily opt for the new regime with up to Rs 60,000 rebate. This effectively makes the entire Rs 12 lakh income tax free.
5. If you have higher income and want to explore the old regime, it is recommended to calculate your total deductions to reduce liability. The old regime offers a wide range of deductions under sections like 80C, 80CCD, 80D and 24(b), covering investments, insurance and home loan interest.
6. Those seeking deductions under the new regime must understand that here the scope is limited. Taxpayers only get: standard deduction, certain NPS benefits via employers and select exemptions such as the interest paid on a home loan taken for the purchase or construction of a let-out property. In the new regime, salaried employees cannot claim benefits such as house rent allowance or exemptions on total NPS contributions even if it is a part of their salary structure.
7. Even with a wide range of exemptions in the old regime, the higher tax rates can result in minimal benefits. Experts have said that unless one has deductions ranging Rs 3 to 4 lakh, tax liability in the old regime will still be higher than the new regime.
8. In the old regime, the basic exemption limit is just Rs 2.5 lakh. In contrast, the new regime has a basic income exemption limit of Rs 4 lakh. This means that tax liabilities are calculated once the income crosses these thresholds in the respective regimes.
9. Even if a taxpayer has zero tax liability, filing an Income Tax Return (ITR) is still required if the income is beyond the basic exemption limit. So, if you switch to the new regime but fail to file ITR on income above Rs 4 lakh, it can lead to penalties by the tax department.
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