With the Income Tax Return (ITR) filing season upon us, many taxpayers are grappling with the decision of whether to opt for the old or new tax regime. While the new tax regime, introduced in 2020, offers lower tax rates, it also comes with a significant caveat – it does not allow for deductions on various tax-saving instruments such as National Savings Certificates (NSC), Keyman Insurance Policy (KVP), Unit Linked Insurance Plans (ULIP), and Public Provident Fund (PPF). However, the old tax regime, while charging higher tax rates, permits taxpayers to claim these deductions.
For those who have made investments in tax-saving instruments but missed informing their employers about their choice of tax regime during the year, there is still a way to claim deductions. It is important to note that taxpayers can still file their ITR under the old tax regime, even if they were initially enrolled under the new regime. By doing so, they can claim the deductions as a tax refund, provided they choose to opt out of the new tax regime.
The new tax regime: A default option
Under the Finance Act 2023, the new tax regime has become the default tax regime from FY 2023-24 (Assessment Year 2024-25). This means that if taxpayers do not inform their employers of their preference, they will automatically be enrolled under the new tax regime. For those who want to benefit from exemptions and deductions available under the old tax regime – including 80C and 80D deductions – it is vital to opt out of the new tax regime.
For salaried individuals, the option to opt for the old regime must be communicated to the employer during the financial year. If this is not done, it will be assumed that the employee continues under the default tax regime. In such cases, taxpayers can simply select the “opting out of new regime” option in their ITR form. However, those with business or professional income will be required to file Form 10-IEA before the due date of filing their returns.
Which regime should you choose?
The decision to choose the old or new tax regime depends on various factors, including your total income and the tax-saving instruments you have invested in. Experts argue that taxpayers who have made significant investments in tax-saving instruments should favour the old tax regime to benefit from available deductions. However, taxpayers who do not invest in such instruments may find the new tax regime more attractive due to its lower tax rates.
CA Pratibha Goyal, partner at PD Gupta & Company, a Delhi-based chartered accountancy firm, advises, “Taxpayers having significant deductions and exemptions, such as provident fund, ELSS (Equity Linked Savings Scheme), NPS (National Pension Scheme), Mediclaim, Home Loan, and HRA (House Rent Allowance) should opt for the old tax regime. The choice of regime largely depends on the total income and available deductions and exemptions.”
Goyal further explains that for taxpayers with a Cost to Company (CTC) of up to ₹7 lakh, the new tax regime would be more advantageous, as they wouldn’t need to make tax-related investments to save on income tax. On the other hand, taxpayers with a higher CTC, say ₹20-50 lakh, should consider opting for the old tax regime if their income tax deductions or exemptions exceed ₹4,33,333.
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Echoing Goyal’s advice, CA Paras Gangwal, founder of ThetaVega Capital, says, “You should go for the old tax regime if you are eligible to claim substantial exemptions via insurance premiums, PPF, home loans, or education fees. The old regime is particularly suited for taxpayers who actively invest in tax-saving instruments, as it offers a tailored approach to reducing tax liability while promoting disciplined financial planning and long-term wealth creation through government-recognised savings schemes.”
Tax calculator: A handy tool to compare regimes
To assist taxpayers in making the right choice, the Income Tax (I-T) department has provided a tax calculator. This tool allows taxpayers to input their income and investment details to calculate their tax liability under both the old and new tax regimes. By using this calculator, individuals can assess which tax regime results in a lower tax liability and choose accordingly.
In conclusion, while the new tax regime may appear more appealing due to its lower tax rates, the old tax regime could be more beneficial for those with significant investments in tax-saving instruments. It is important for taxpayers to carefully evaluate their options before finalising their ITR filing to ensure they make the most of available deductions and minimise their tax liability. As always, consulting with a tax professional can provide valuable insights into the best choice for your specific financial situation.
