New versus old tax regime: Analyse the benefits before making a choice

Under the simplified regime, it is not possible to claim certain deductions and exemptions.  Listed below are the exemptions and deductions widely used by individuals and which will not be available under the new tax regime.

In addition to the above, the loss under the head ‘Income from House Property’, (possibly on account of interest for a let-out house property) cannot be set off against income under other heads, but will be deemed to have been set off.

For individuals who have business income, deductions such as depreciation, investments in new plant and machinery, tea, coffee, rubber development, specified businesses, agriculture extension projects and scientific research expenditures cannot be availed under the new tax regime.

Time of the year to exercise this option

For individuals who do not have business / professional income:

While this option can be exercised by individuals at the time of filing of return, until recently it was not clear if they could declare their choice to opt for new regime, to employers for the deduction of tax.

The absence of enabling amendments to the tax deduction provisions in Finance Act 2020, has led to confusion among employers as to whether they can apply the new tax regime at the time of tax deduction. Subsequently, in order to avoid hardship to individual taxpayers willing to opt for the new tax regime, the Central Board of Direct Taxes (CBDT) has issued clarification via circular on April 13, 2020.

As per the clarification, an employer can apply the tax rates prescribed under the new tax regime while withholding taxes from salary. However, the employee has to notify the employer if he wants to opt for new regime. In case no intimation is provided, then the employer can continue to withhold the tax as per old regime.

Further, the employee can notify the employer only once in each financial year and that intimation can be provided any time during the financial year.

For individuals who have business / professional income:

Individuals with business income can exercise this option before the due date of filing the tax return. In case an individual with business / professional income opts for the new tax regime, he will have to continue with the new regime for all subsequent years. He can withdraw the option exercised and revert to the old regime only once. Once withdrawn, he will become ineligible to use the new regime option for any of the future years, unless he ceases to have business / professional income.

Can employee change the regime at the time of tax return filing?

It may happen that the individual may opt for the new regime and notify the employer at the start of the financial year. However, as the year passes by, he may realise that the old regime would have worked better for him due to changes in the estimated income and deductions/exemptions.

In such a case, it is not necessary that the employee needs to continue with the regime selected and declared with his employer. He has the right to change the option at the time of filing his income tax return as per the provisions of the Act.

Points to remember while choosing the regime

It is necessary that individual taxpayers take an informed decision on whether to opt for the new personal tax regime, or not, as this could help in optimising taxes.

Further, though it is possible to change from one scheme to another at the time of filing of the tax return, it may so happen that excess taxes are deposited by employer as per the regime opted for at the start of the financial year. These excess taxes will have to be claimed as a refund from tax authorities which could result in cash flow issues for the individual.

While the individual would be aware of his salary income, one should additionally consider the following points for judicious selection of the regime:

-Income other than salary income (e.g., interest income, dividend / mutual fund income, etc.)

-Expected increments in the salary and bonus receivable during the financial year

-Donations one expects to make in the financial year

-Increase in the rent payable over the year to estimate correct House rent Allowance exemption

-Travel plans during the year for which he expects to claim Leave Travel Allowance exemption

The new tax regime is a welcome amendment to simplify individual taxation. However, a thoughtful analysis is necessary to choose the appropriate regime beneficial to the individual.

(The writer is a Partner with Deloitte India. Bhavin Rajput, Prachi Phansikar and Nikita Malkan from Deloitte Haskins & Sells LLP also contributed to the article)