• Notification Date: 20-04-2023
  • Notification No: N/A

Key Things to Note Before Choosing your Income Tax Regime

Employers have started rolling out the tax declaration form for employees for this new financial year. The option of selecting between old and new tax regimes is available every year since the introduction of the new regime. While the new income tax regime was introduced in 2020, the Budget 2023 made several changes to it. 

New Tax Slabs 

After the amendments, the tax rebate has been extended on income up to Rs 7 lakh as per Section 87A, as against Rs 5 lakh. The basic exemption limit has been raised to Rs 3 lakh from Rs 2.5 lakh. The finance minister also allowed a standard reduction of Rs 50,000 under the new regime which is already available in the old tax regime. 

Old Tax Slabs 

The old income tax slabs regime has not been abolished. Given that, taxpayers still have the option between the two regimes when paying their taxes and they can accordingly decide which is better for them. 

According to the old tax regime, if the total income of an individual is not more than Rs 2.5 lakh, the tax rate is nil. If the income falls in Rs 2.5-5 lakh bracket, a 5 percent income tax is payable. However, those earning up to Rs 5 lakh can claim a rebate of Rs 12,500 under Section 87A of the Income Tax (I-T) Act. 

For individuals earning Rs 5-10 lakh, tax is deducted at the rate of 20 percent. If the total income of an individual is more than Rs 10 lakh, 30 percent tax is payable. 

Default Tax Regime and the Implication 

Notably, the new tax regime has become the default option from FY23-24. Hence, if taxpayers do not inform their employer which tax regime they have chosen, TDS will be deducted based on the new income tax slabs under the new tax regime. 

"So, if the employee does not explicitly request to consider the employer for the old tax regime before the April 2023 payroll cut-off, TDS may be deducted by the employer on a higher estimate of annual tax liability (eg without considering any tax deductions)," said Alok Agrawal, Partner at Deloitte India. 

According to a Central Board of Direct Taxes (CBDT) circular on 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 based on the tax regime option communicated in April. 

However, at the time of filing the Income Tax Return (ITR) also, employers can switch from the old to the new regime or vice versa, whichever is more beneficial. 

How to Decide the Suitable Tax Regime  

The Income tax department has released a 'tax calculator' to help individuals decide if the new income tax regime announced in the Budget is good for them or if the old one is better. The tax calculator is live on the income tax department's portal https://incometaxindia.gov.in/. Taxpayers can input information related to their salary and deduction. The online tax calculator will then reveal the tax savings under both regimes.