From FY 2023-24, the new tax regime has become the default tax regime. This means that if an individual does not select any tax regime for TDS on salary, the deduction would be done on the basis of the income tax slabs under the new tax regime. Till FY 2022-23, the old tax regime was the default one.
Though the new tax regime has become the default, individuals still have the option to choose a regime suiting their convenience at the time of filing income tax returns. Hence, any tax regime opted now for the purpose of TDS on salary will have no bearing on the tax regime opted at the time of filing the tax return.
Sujit Bangar, a former IRS officer and founder of Taxbuddy.com, says, “If a taxpayer opts for the new tax regime for TDS on salary now but opts for the old tax regime at the time of filing next year, then he/she is likely to face some hassles at the time of filing the tax return.”
So a question arises regarding the issues that an individual is likely to face if the tax regime for TDS on salary is different from the regime opted at the time of filing the ITR.
Also Read: New income tax slabs for new tax regime for FY 2023-24One should note the difference between the old and new tax regimes. The old tax regime allows an individual to claim deductions and tax exemptions; the new tax regime does not allow an individual to claim many tax exemptions and deductions. From the current financial year (2023-24), an individual can claim standard deduction of Rs 50,000 and deduction under Section 80CCD (2) of the Income-tax Act, 1961, under the new tax regime.
ET Wealth spoke to various tax experts regarding the issues one is likely to face if the tax regime is changed at the time of filing the ITR.
“A taxpayer will switch from new to old tax regime or vice versa only if the tax outgo is lower,” says Aastha Dhowan, Partner at N.A. Shah Associates, a tax consultancy firm.
Here is a look at the issues individuals can face due to a change in tax regime and what they can do about it.
Can an individual claim tax exemption on HRA, LTA, etc at the time of filing ITR?
Bangar says, “An individual can claim tax exemption on HRA, LTA, etc if the old tax regime is chosen at the time of filing the ITR. TDS on salary is on the basis of the new tax regime due to which the Form 16 received by an employee will have details of the gross salary. While claiming tax exemptions in the ITR form, an individual needs to be careful as these needs to be manually calculated.”
Do note that there is no clarity regarding tax exemption claim on leave travel allowance (LTA) at the time of filing ITR.
Abhishek Soni, CEO, Tax2win.in, an ITR filing website, says, “In our view, the tax exemption on LTA can be claimed only if valid travel bills are submitted to the employer. The Income-tax Act is silent on whether LTA tax exemption can be claimed if bills are not submitted to the employer.”
Can an individual claim deduction under Section 80C to 80U while filing ITR?
Individuals can claim the deductions they are eligible for under sections 80C to 80U at the time of filing ITR. Dhowan says, “Deductions under Section 80C to 80U can be claimed while filing ITR even if individuals opt for the old tax regime for TDS on salary but forgets to submit investment proofs.”
Can tax exemption on food coupons be claimed while filing ITR?
Soni says, “Tax exemption on food coupons is not available under the new tax regime. If a salaried individual switches from the new to old tax regime while filing ITR, in our view, tax exemption on food coupons cannot be claimed.”
However, tax experts have not arrived at a consensus in this regard. Bangar says, “An individual can claim all the eligible tax exemptions and deductions if the old tax regime is chosen while filing ITR.”
Do note that eligible tax exemptions and deductions are those that an individual receive as per their Cost to Company (CTC) from their employer. Hence, an individual will be eligible to claim tax exemption on HRA, LTA, food coupons and other allowances, provided they are paid to you by your employer.
Other things to keep in mind
When an individual switches the tax regime, especially from new to old, while filing the ITR, one must keep the documents related to investments proofs and tax exemptions handy. This is because there will be a mismatch in the ITR filed by the individual and the TDS return filed by the employer.
Dhowan says, “The income tax department can send you a notice asking salaried individuals to show proof of deductions and investments declared in the ITR. If an individual is unable to provide proof, the individual will have to pay an additional tax along with penalties.”
If advance tax is applicable on individual income, then penal interest will be applicable for any shortfall in advance tax due to shift in tax regime, adds Dhowan.