If you have significant
deductible investments, the old regime could save you more money, but crunch
the numbers
As a new
financial year begins, expect your employer to reach out to you regarding
choosing a tax regime for 2024-25, if they have not already. This decision is
crucial. The choice of tax regime dictates how your income will be taxed. If
you don’t make the right pick, you might end up losing money.
The new tax
regime has become the default tax regime for individuals after the Finance Act,
2023, from the financial year 2023-24 onwards.
The new regime
The new tax
regime offers lower tax rates but with fewer deductions and exemptions. Here,
taxpayers cannot claim various popular deductions under Sections 80C, 80D and
24. However, some deductions, such as standard deduction and family pension
(those receiving a family pension can claim a deduction of Rs.15,000 or one-third of the pension, whichever
is lower) remain available. This regime simplifies the tax structure and
reduces the tax burden for many, especially those who do not have significant
deductions under the old regime.
The benefit of
a rebate under Section 87A is available to resident individuals opting for the
new regime.
The maximum
rate of surcharge is 25 per cent for taxpayers opting for the new tax regime,
compared to the highest rate of 37 per cent applicable to taxpayers opting for
the old regime.
Old regime:
Who should stick to it?
Under the old
regime, taxpayers can avail of various deductions and exemptions, such as those
under Section 80C, 80D, house rent allowance, and the like, which can
significantly reduce their taxable income. The old regime follows a system that
taxpayers are accustomed to, with well-established rules and procedures. For
taxpayers with significant investments and expenses eligible for deductions,
the old regime may result in lower tax liabilities compared to the new regime.
New tax
regime: Is it for you?
The decision
to opt for the new tax regime will depend on the amount of exemptions and
deductions an assesses can avail of.
This regime
would be more suitable for young taxpayers as they do not have any historical claims.
They will be able to pay taxes at lower slab rates under the new regime. Individuals
with income above Rs. 7 lakh need to estimate their tax
liability under the old regime after claiming deductions, and compare it with
their tax liability under the new regime without the available deductions. They
can then go for whichever regime requires them to pay lower tax.
Factor in
breakeven point
The breakeven
point is the amount where there is no difference in tax liability between the
two regimes. We calculated the breakeven points for different situations to
help taxpayers determine which option is more beneficial. For example, if an
individual has no deductions available under the old tax regime, it would
always be more beneficial for them to opt for the new tax regime.
Likewise, if a
taxpayer avails of only Section 80C deduction, it would be beneficial for them
to opt for the new tax regime. If you avail deductions under both Sections 80C
and 80D, then the breakeven point is Rs. 8,25,000. It would be beneficial to
opt for the new tax regime under Section 115BAC only if you have an income
above this breakeven point. If you avail of deductions under Section 80C,
Section 80D and Section 24 (interest on housing loans,) you should never go for
the new tax regime.
Switching option
Those with
professional or business income can switch between the two regimes only once
during their lifetime. Others can switch regimes yearly. To switch back to the
old tax regime, submit Form 10-IEA while filling the tax return. You can switch
between regimes even at the time of filling your return.
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