As the last date to file the income tax return (ITR) looms closer and you have not yet filed the return, it is imperative to first decide the tax regime you plan to opt for. One should file their ITR by July 31 of a financial year to avoid penalties.
It is noteworthy to mention here that the new tax regime is the default regime; so one will have to deliberately opt for the old tax regime if you want to avail any of the tax deductions and exemptions.
The new tax regime was introduced in Budget 2020. Income tax slabs were altered and taxpayers were offered concessional tax rates. However, these rates were offered with the condition that several exemptions and deductions, otherwise available under the old tax regime, will not be available under the new tax regime.
In Budget 2023, the government focused more on the new tax regime making it more attractive for the taxpayers.
Let us understand more about the two regimes:
Old tax regime: The regime that existed before the introduction of the new tax regime is known as the old regime. This regime allows people to claim more than 70 tax deductions and exemptions to reduce their taxable income.
These are the tax rates under the old tax regime:
New tax regime: The Finance Act 2023 amended the provisions of Section 115BAC to make the new tax regime the default tax regime for the assessees.
These are the rates applicable under the new tax regime:
For resident individuals whose total income does not exceed ₹7 lakh, a tax rebate of up to ₹25,000 under section 87A is applicable.
Also, the rate of surcharge on income above ₹5 crore has been reduced from 37 per cent to 25 per cent under the new tax regime. Therefore, the highest effective tax rate has been reduced from 42.74 per cent to 39 per cent under the new tax regime.
Deductions allowed under the new tax regime include a standard deduction from salary of ₹50,000 and deduction under section 80CCD(2) for employer’s contribution to employee NPS accounts.
Other deductions which are not allowed include leave travel allowance, HRA, medical insurance premium and interest on home loan for self-occupied houses.
Informing the employer
The employee is supposed to inform the employer with regard to his intended tax regime during the year.
If the employee does not intimate the employer, the employee will continue to be in the default tax regime, and it will be presumed that he has not exercised the option to opt out of the new tax regime.