ITR filing 2023-24: Switching tax regimes while filing returns? Here’s what you need to know

Income tax: Missed choosing the old tax regime while submitting investment declarations? You can still select it while filing returns

Finance Minister Nirmala Sitharaman announced a host of changes in the new tax regime as part of Budget 2023 announcements.

For one, she made the new, minimal exemptions tax regime more attractive, particularly for low-earners by hiking rebate limit up to Rs 7 lakh. She also sweetened the deal for high networth individuals earning over Rs 5 crore by bringing down the peak surcharge rate from 37 percent to 25 percent (resulting in an effective tax rate of 39 percent) under the new regime.

Salaried individuals have the luxury of switching between old and new tax regimes every year. This apart, even if you had chosen, say, the new tax regime (default from FY 2023-24 onwards) while submitting your investment declaration to your employer, you can pick the old tax regime at the time of filing your income tax returns if you realise that you are eligible for multiple deductions that can reduce your tax payable.

Here’s an easy guide to selecting the tax regime most suitable for you even while completing your tax return filing exercise.

Also read: How to choose between old and new tax regimes 

Who should choose the new tax regime?

The answer to the question of how to identify the regime that ensures minimal tax outgo depends on your income level and the amount of deductions or exemptions you claim. Now, a salaried individual who claims fewer deductions and earns less than Rs 7 lakh per annum would be better off with the new tax regime (see graphic).

As per Deloitte India calculations, for most income tax slabs, the higher the number of total deductions (under sections 80C, 80D, 24b on home loan interest paid, and so on) claimed, the less lucrative the new regime will be. This is because tax breaks reduce the taxable income and tax payable under the old regime.

For example, if you are a salaried individual with an income of Rs 11 lakh, and your total deductions amount to less than Rs 3.25 lakh, the new regime will be better suited for you, ensuring lower tax outgo (see graphic). If your total deductions are higher than this amount, then the old regime will be more beneficial.

This break-even point is referred to as ‘equaliser’ in the table (see graphic). It will vary as per the tax slab. For example, this break-even point is Rs 4.25 lakh for incomes between Rs 15 lakh to Rs 5.5 crore. This is the point at which the tax payable under both regimes is the same.

Your deductions can easily cross Rs 4.25 lakh assuming you exhaust the Rs 1.5-lakh tax deduction limit under section 80C via employee’s provident fund (EPF), housing loan principal repayment, or other tax-saver investments. In addition, you can claim deductions on health insurance premiums under section 80D (maximum limit for non-senior citizens is Rs 25,000) and housing loan interest paid under section 24b (Rs 2 lakh). Then, there is a flat standard deduction of Rs 50,000.

ITR filing 2024: Old vs new tax regimes - income level, deductions will constitute the key determinants

Also read: Moneycontrol's income tax calculator 

New regime better for high-income earners

For individuals who attract the highest tax slab rate and surcharge (effective tax rate), largely, it’s the new tax regime that will result in more savings, unless you avail of a significantly higher house rent allowance (HRA). This can tilt the scales in favour of the old regime.

For example, if a salaried individual with an income of over Rs 6 crore stays in a luxurious apartment in a metro city and shells out rent of Rs 5 lakh a month, her HRA could lead to substantial tax savings under the old regime.