July 31 is less than a week away and time is running out for tax-payers to file their returns for the financial year 2023-24 (assessment year 2024-25). This is not an exercise that should be left for the last minute. It can be time-consuming, especially if you have to switch between old and new tax regimes while filing returns.
Salaried individuals can switch between old and new tax regimes every year. Budget 2023 designated the new, simplified tax regime as the default structure and many salaried tax-payers who wanted to stick to the old regime missed explicitly picking the latter while submitting their proposed investment declarations in April 2023. As a result, their employers might have deducted excess tax from their salaries through FY 2023-24.
Make the ITR switch
However, you can select the old tax regime at the time of filing your returns and claim tax refund for additional deductions.
You will be able to claim all the deductions you are eligible for. For instance, if you are filing returns using Form ITR-1, under personal information, the form will ask you this question: "Do you wish to exercise the option under section 115BAC(6) of opting out of the new tax regime?" The default selection will be 'No', so if you wish to move to the old tax regime, click 'Yes'. "Once option will be changed to old tax regime after selecting ‘Yes’ then all deductions will get enabled and then taxpayer will be able to claim all deductions," the I-T department's guide explains.
Also read: How to choose between old and new tax regimes for the financial year 2023-24 (assessment year 2024-25)?
Who should choose the new tax regime?
The answer depends on your income level and the amount of deductions or exemptions you claim. A salaried individual who claims fewer deductions and earns less than Rs 7 lakh a year would be better off with the new tax regime (see graphics).
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 would, Deloitte India calculations show. This is because tax breaks reduce the taxable income and tax payable under the old regime.
If, for instance , 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 graphics). If your total deductions are higher, then the old regime would be more beneficial.
This break-even point is referred to as "equaliser" in the table (see graphics). 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 and 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.
New regime better for high-income earners
For individuals who attract the highest 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.
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