The changes under the Income Tax Act, 1961, make it important for salaried individuals to do their tax planning in this month itself. This is because the tax regime opted by an individual will decide how much tax is deducted from their salary income. Not doing proper tax planning will lead to higher TDS from salary income and reduce the take-home pay.
Do note that from FY 2023-24, the new tax regime has become the default option. Hence, if you do not inform your employer which tax regime you have chosen, TDS will be deducted on the basis of the new income tax slabs under the new tax regime.
If higher tax is deducted from your salary income than your actual tax liability, you will have to wait till the income tax return (ITR) form is processed by the income tax department and income tax refund is issued to get that excess money back. So when the employer asks for the investment declaration to deduct taxes on salary income, the individual must analyse the pros and cons of both the tax regimes before choosing one and informing the employer about it in April.
A salaried individual is required to choose between old and new tax regime every financial year. According to a Central Board of Direct Taxes (CBDT) circular dated April 13, 2020, a salaried individual can choose either of the tax regimes for the purpose of TDS on salaries. Once the tax regime is finalised, it cannot be changed during the financial year. The employer will continue to deduct taxes on salary on the basis of the tax regime option communicated in April. However, another tax regime can be chosen at the time of filing the ITR.
Do note that there are certain exemptions that cannot be claimed at the time of filing an income tax return. For instance, tax exemption on leave travel allowance cannot be availed under the old tax regime at the time of filing ITR. The tax exemption can be claimed through the employer only. However, tax exemption on house rent allowance can be claimed under the old tax regime at the time of filing the ITR.
How to choose between old and new tax regime
To choose between the two regimes, one must consider the tax exemptions and deductions that an individual can claim under the old tax regime. Once an individual has arrived at the net taxable income under the old tax regime (after subtracting all the eligible deductions and exemptions), the tax liability can be calculated.
The tax liability under the old tax regime must be compared with the tax liability under the new tax regime. It makes sense to choose the regime that has the lower tax liability, and this option must be communicated to the employer to deduct TDS from salary.
Do note that if your salary is hiked during the financial year or you have accrued capital gains or other incomes such as interest income from fixed deposits, dividends from equity shares and/or mutual funds, then you must compare the tax liability under both the tax regimes again. This is because the other tax regime could become more favourable for you than what was chosen in April.
What are the changes announced under the new tax regime?
The government wants more and more people to opt for the new tax regime. So they have provided certain benefits under this to make it more attractive. Following are the changes announced under the new tax regime:
New income tax slabs under new tax regime
The income tax slabs under the new tax regime have been reduced to five from six earlier. Here are the income tax rates under the new tax regime effective from April 1, 2023, for FY 2023-24.
Taxable income Income tax rates from April 1, 2023
|Taxable income||Income tax rates from April 1, 2023|
|Rs 0 to Rs 3,00,000||0|
|Rs 3,00,001 to Rs 6,00,000||5%|
|Rs 6,00,001 to Rs 9,00,000||10%|
|Rs 9,00,001 to Rs 12,00,000||15%|
|Rs 12,00,001 to Rs 15,00,000||20%|
|Rs 15,00,001 and above||30%|
Hike in basic exemption limit under new tax regime
Due to changes in the income tax slabs under the new tax regime, there has been a hike in the basic exemption limit. The basic exemption limit under the new tax regime is Rs 3 lakh now, from Rs 2.5 lakh earlier – a hike of Rs 50,000. The basic exemption limit of Rs 3 lakh is applicable from April 1, 2023.
Do note that the basic exemption limit under the new tax regime is the same for all individuals irrespective of age. On the other hand, in the old tax regime, the basic exemption limit is based on the age of the individual in the financial year in which the income is earned.
|Basic exemption limit under new rax regime||Age of individual||Basic exemption limit under old tax regime|
|Rs 3,00,000||Below 60 years||Rs 2,50,000|
|Between 60 and 80 years||Rs 3,00,000|
|Above 80 years||Rs 5,00,000|
Standard deduction under new tax regime
The benefit of standard deduction available to salaried and pensioners (including family pensioners) have been introduced under the new tax regime. An individual opting for the new tax regime for FY 2023-24 will be eligible to claim a standard deduction of Rs 50,000. Family pensioners opting for the new tax regime will be eligible to claim standard deduction of Rs 15,000.
Zero tax payable for income up to Rs 7 lakh
An individual opting for the new tax regime for FY 2023-24 will pay zero tax if the taxable income does not exceed Rs 7 lakh in a financial year. Further, an individual having taxable income up to Rs 7.5 lakh can claim the benefit of standard deduction of Rs 50,000. This will bring down the taxable income to Rs 7 lakh and thereby give them zero tax liability.
Do note that paying zero tax does not mean that an individual is not required to file an income tax return. An individual opting for the new tax regime is mandatorily required to file ITR if their taxable income exceeds Rs 3 lakh in a financial year. Nil tax till incomes up to Rs 7 lakh is available due to tax rebate under Section 87A.
New tax regime becomes default option
The government has made the new tax regime the default option. This means that unless you specifically opt for the old tax regime, your employer will deduct taxes from your salary on the basis of the income tax slab applicable on your income under the new tax regime.
Reduction in surcharge rate for high-income earners
For individuals having taxable incomes above Rs 5 crore, the surcharge rate has been reduced to 25% from 37%. The reduction in surcharge rate will lower the tax liability of high-income earners.
Are there any changes in the old tax regime?
Though many changes have been made in the new tax regime, no changes have been made in the old tax regime. An individual opting for the old tax regime in FY 2023-24 will continue to calculate income tax the way they were doing it in the previous years.