Employers will soon want documentation of your qualifying investment and expenditure as the calendar year comes to a conclusion, in order to align your tax due before the end of March. Now is an excellent time to reconsider your tax options, particularly your choice between the new and old tax systems.
Employees often convey their preferred tax regime to their employers at the start of the fiscal year. This declaration, however, is not legally enforceable because you can change your mind before completing your income tax return.
So, how do you decide between the new and old tax regimes? The new tax structure is divided into six income brackets, with a basic exemption limit of Rs 3 lakh. It also provides a reduced surcharge for income above Rs 5 crore (25%) than the previous system (37%). Tax rebate limits have also been raised to Rs 7 lakh in the new regime, which benefits people with fewer claimable investments.
Individuals with fewer deductions benefit from the new regime, whilst those eligible for multiple deductions such as HRA, health insurance, interest on home loan, and 80C deductions such as PPF, EPF, insurance, and Equity Linked Saving Schemes benefit from the previous regime. Before making an informed decision, taxpayers must balance the exemptions lost under the new rule.
For example, the computation indicates that claiming a deduction of Rs 3.75 lakh (minus a standard deduction of Rs 50,000) results in the same tax liability for a gross income of Rs 15.5 lakh and higher. As a result, if you combine deductions such as a home loan, health insurance, and 80C investments, you may have a smaller tax burden under the former tax regime. There are many breakeven deductions available for income less than Rs 15.5 lakh. Online income tax calculators can also assist you in comparing liabilities under different regimes and determining the most advantageous alternative.
If you do not select anything, the new tax system is selected by default. If you choose deductions later when filing your ITR, you may receive a tax notification. For example, suppose an employee fails to file a declaration with their employer (and therefore a new tax regime is adopted by default) and claims a gross deduction under 80C and HRA on their income tax return. In this situation, the income reported on Form 26AS will not match the income shown on the income tax return, and the employee may receive a notification under Section 142(1) requesting additional information. Notice is often made under Section 154 for tax credit mismatches.
