• Notification Date: 18-04-2023
• Notification No: N/A

Income Tax Regime Suitable for Salaried Taxpayers

The Central Board of Direct Taxes (CBDT) — via a recent circular — stated that employees ought to intimate their employers about the income tax regime they want to opt for. 

As we know there are two income tax regimes as of now: old and new. The old regime enables taxpayers to claim deductions and pay tax on the remainder of their income. 

However, the new tax regime entitles taxpayers to pay taxes at a lower tax rate, but the trade-off is that they will have to let go of regular exemptions such as those allowed under section 80C and 80D. 

Income Tax department recently uploaded a tax calculator on its portal that shows tax liability according to both regimes: old and new.  

“What is interesting is that the default regime is the one that would lead to a higher tax liability whereas the old regime is more tax-friendly, especially for those who have made investments. So, to be able to reduce your tax liability, you need to refrain from going with the default option,” says Delhi-based chartered accountant Deepak Agarwal. 

Default tax regime 

It is vital to note that the new tax regime is the default regime and taxpayers opting for the old regime must specify the same categorically. 

In case taxpayers do not intimate their employer about the choice of tax regime, employer will deduct TDS (tax deducted at source) as per the new regime. 

“Each such employee shall intimate the same to the deductor, being his employer, regarding his intended tax regime for each year and upon intimation, the deductor shall compute his total income, and deduct tax at source thereon according to the option exercised,” reads the circular. 

Old Vs New Regime 

Here we try to dwell deeper into which tax regime salaried employees should stick to. After speaking to several experts, one can draw a conclusion that the old regime scores over the new one hands down. 

Over 90 percent of salaried persons stand to benefit from the old tax regime as our internal survey shows if they claim the same deduction as they have claimed last year, says Mumbai-based Chartered Accountant (CA) Chirag Chauhan. 

The lines between the old and the new are not too clear as of now. And the most experts assert that taxpayers are likely to find the old regime beneficial, while the others may find the new one better. 

So, it totally depends on what suits you the most in terms of lower tax liability. 

“We are not predisposed to one regime or the other. We look at both the scenario and choose the one that leads to a lower tax,” says Ravi Saraogi, cofounder, Samasthiti Advisors. 

“Earlier if you were making an investment in PPF or insurance, then the old regime is better in the most cases,” he says. 

While explaining through a set of calculation, Sridharan S, Founder of Wealth Ladder Direct, says the old tax regime enables taxpayers to claim tax exemption of up to ₹4.5 lakh apart from the standard deduction of ₹50,000. 

“If one has borrowed a home loan, then the interest on home loan of up to ₹2 lakh, NPS contribution of ₹50,000, another ₹50,000 deduction under section 80D, and ₹1.5 lakh of section 80C exemption can be claimed — which are not permitted in the new tax regime. This means if someone draws a salary of ₹9.9 lakh, his tax liability will be zero. However, in the new tax regime, there will be tax liability for income above ₹7 lakh,” explains Mr Sridharan. 

In conclusion, we can say that salaried taxpayers can calculate their tax liability by entering their income details in the tax calculator on the department’s website. 

And they can then choose the regime which leads to a lower tax liability. And if you have made investments such as PPF, insurance and have an outstanding home loan — then likely, opting for old tax regime would make more financial sense.