MUMBAI: As we have entered the new financial year, it is the right time for income tax planning for the year ahead. This year’s income tax planning is different from previous years’ because Budget 2023 has made the new tax regime a default tax regime for the financial year 2023-24.
It means if the taxpayers do not opt in for the old tax regime, she/he will be taxed as per the new tax regime. Salaried individuals must begin their tax planning exercise this month itself and choose the appropriate tax regime for them. The decision should be made carefully as it will decide the amount you will pay as tax in the current year. It is crucial for taxpayers to determine their income and start tax planning in advance to minimise their tax liability for 2023-24.
“The new tax regime has been made the default regime this year. For the employed, if the taxpayers are not careful about declaring their intended tax regime to their employer at the onset of the financial year and within the declaration timelines of such employer, they would be covered under the new regime,” Tapati Ghose, Partner, Deloitte India told TNIE. “This however, can be corrected subsequently while filing the tax returns if the taxpayer chooses to opt for the old regime,” she added.
Choosing between old and new tax regime
The most important factor to keep in mind for income tax planning is the selection of an appropriate tax regime. There are several key factors to consider before you finalise the decision to select the tax regime.“The option to opt for old or new tax regime would depend upon various factors such as the total income of the taxpayer, his intention to make investment, marginal slab rates applicable to him, exemptions and deductions available to such taxpayers, etc. Hence, the taxpayer needs to undertake an evaluation and accordingly, assess his income under both such tax regimes in order to choose the beneficial amongst both such regimes,”Suresh Surana, Founder, RSM India- a tax consulting firm- said.
Experts say that taxpayers should estimate their taxable income and determine the tax bracket applicable to them. It is advisable to determine the tax saving investments and expenses like home loan instalments, house rent, mediclaim, insurance, donation etc. which a taxpayer expects to incur during the year. “If the taxpayer is making a substantial investment in tax saving investments or incurring expenditure which can be claimed as deduction, then the old regime will prove to be beneficial. Alternatively, the new regime could prove beneficial to him,” Anita Basrur, Partner, Sudit K Parekh & Co said.
Deductions and exemptions
After you have selected the appropriate tax regime, it’s time to look at the deductions and exemptions available in old and new tax regimes. A taxpayer can calculate the net taxable income under the old tax regime after considering all the eligible deductions and exemptions and can know the tax liability. Once the taxpayer knows tax liability under the old and new regime, he can choose the regime under which the tax outgo is less.
“Apart from lower tax rates, the new tax regime is fairly simple to apply and less burdensome as there is minimal documentation to be maintained since there aren’t many deductions/exemptions available. Further, the key driving factor for making an investment choice is no longer the tax reliefs the financial product offers. Some of the deductions/exemptions available in the new tax regime are the standard deduction, employer’s contribution to National Pension Scheme(NPS), exemption pertaining to gratuity and leave encashment, etc,” said Ghose.
While the old tax regime has enough room for claiming deductions against various allowances forming part of salary and also for specified investments and expenses such as Public Provident Fund (PPF), NPS, repayment of housing loan, payment of tuition fees, etc., the new tax regime may restrict certain benefits and exemptions.
The old tax regime offers an exemption limit of R2,50,000 to individuals with the highest tax slab rate of 30% applicable on income above R10,00,000. The new tax regime is wider in scope with its tax slab rates ranging from 0- 30% with exemption limit up to R3,00,000 and the highest tax rate of 30% is applicable on income above R15,00,000.
“Under the old tax regime resident individuals with total income up to R5,00,000 can claim a rebate of tax. However, from the start of 2023-24, taxpayers with total income up to R7 lakh may claim full rebate of tax. The highest rate of surcharge has been reduced from 37% to 25% under the new tax regime for total income exceeding R5 crore thus reducing the effective tax rate from 42.74% to 39%,” said Surana.
Under the new tax regime, salaried individuals and pensioners can claim the standard deduction of R50,000 only from their salary or pension income. For family pensioners, a standard deduction of R15,000 will be available.
Deductions under New Tax Regime
Standard deduction of Rs 50,000
Interest on home loan on let out properties
Leave Encashment
Family pension
Employers’ contribution to NPS
Contribution to Agniveer Corpus Fund
Exemption on voluntary retirement
Exemption on gratuity
Exemption limit in Old & New
The old tax regime offers an exemption limit of R2,50,000 to individuals with the highest tax slab rate of 30% applicable on income above R10 lakh. Under the new tax regime, salaried individuals and pensioners can claim the standard deduction of R50,000 from their salary/pension income.