• Notification Date: 14-04-2023
• Notification No: N/A

Choose Your Appropriate Tax Regime from April 2023

April marks the beginning of a new financial year, which is when usually new income tax laws come into effect. For the financial year 2023-24, the government has revised the income tax slabs under the new tax regime to make it more attractive in comparison to old tax regime. Further, many other benefits have also been brought under the new tax regime from this fiscal year - such as introduction of standard deduction for salaried individuals, nil tax on taxable income up to Rs 7 lakh, reduction of surcharge on taxable incomes above Rs 5 crore and so on. 
 
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.