Choosing Your Tax Path: Old vs. New Regime Filing Guide
- Prepare for tax season with our guide to navigating India’s old vs. new tax regimes!
- Whether you’re a seasoned taxpayer or new to the game, this article is your ticket to maximize your tax strategy with expert insights.
- Discover which regime suits you best and gain expert insights for smooth filing, especially if you’re self-employed.
It’s tax filing season! The deadline for filing individual taxes is July 31st. During this time, people assess their tax liabilities and file their tax returns. The government offers two tax regimes: the old tax regime and the new tax regime. With expert advice from Mr. Sriram V. Rao, a popular faculty member and chartered accountant, this article will help you decide which tax regime is more beneficial for you, especially if you’re an NRI.
Before diving in, let’s understand the old and new tax regimes. These regimes were introduced post-COVID and have undergone several changes through the Finance Act 2023, which applies from the financial year 2023–24 onwards.
Old Tax Regime
The old tax regime in India has four tax slabs. Here’s how it works:
- Income up to ₹2.5 lakh: no tax.
- Income between ₹2.5 lakh and ₹5 lakh: 5% tax.
- Income between ₹5 lakh and ₹10 lakh: 20% tax.
- Income above ₹10 lakh: 30% tax.
This regime has been in place for many years. In addition to the basic tax, there’s a surcharge for high earners:
- Income between ₹50 lakh and ₹1 crore: 10% surcharge.
- Income between ₹1 crore and ₹2 crore: 15% surcharge.
- Income between ₹2 crore and ₹5 crore: 25% surcharge.
- Income above ₹5 crore: 37% surcharge.
There’s also a 4% cess on the total tax and surcharge. The maximum effective tax rate can be around 42.74%, considering all surcharges and cess.
The old tax regime allows for various deductions, which can reduce your taxable income. Some common deductions include:
- Standard deduction: ₹50,000 for salaried individuals.
- Deductions under Chapter 6A: These include investments and expenses like life insurance premiums, contributions to Public Provident Fund (PPF), National Pension Scheme (NPS), 5-year tax-saving fixed deposits, and medical insurance premiums.
Additional deductions are available for:
- Donations to eligible trusts under Section 80G.
- Interest on education loan.
- Interest on loans for electric vehicles.
These deductions make the old tax regime attractive for those who have significant investments and eligible expenses, despite the high tax rates that can go up to 42.74%. This regime is applicable to both residents and non-residents, allowing individuals to reduce their taxable income through various deductions.
The New Tax Regime
The new tax regime, introduced in 2021 and modified in 2023, has simplified tax slabs and reduced the total number from seven to six. Starting from the 2023-2024 financial year (assessment year 2024-2025), the new slabs are:
- Income below ₹3 lakh: 0% tax.
- Income between ₹3 lakh and ₹6 lakh: 5% tax.
- Income between ₹6 lakh and ₹9 lakh: 10% tax.
- Income between ₹9 lakh and ₹12 lakh: 15% tax.
- Income between ₹12 lakh and ₹15 lakh: 20% tax.
- Income above ₹15 lakh: 30% tax.
The surcharge rates have also been adjusted:
- Income between ₹50 lakh and ₹1 crore: 10% surcharge (unchanged).
- Income between ₹1 crore and ₹2 crore: 15% surcharge (unchanged).
- Income above ₹2 crore: 25% surcharge, with the previous highest surcharge of 37% removed.
In summary, the maximum surcharge under the new regime is 25%, lower than the old regime’s maximum.
Old Tax Regime Vs New Tax regime: What’s the difference?
A major difference in the new tax regime is the lack of deductions. Besides the standard ₹50,000 salary deduction, no other deductions under Chapter 6A are allowed. This means investments in ELSS mutual funds, PPF, 5-year tax-saving bank deposits, tuition fees, and similar expenses are not deductible. These deductions were available under the old tax regime but are not permitted in the new tax regime. This is a significant change for individuals choosing between the old and new tax regimes.
Old vs. New Tax Regime: Can we choose?
Starting in the financial year 2023-24, the new tax regime is the default for everyone. This means that if you file your tax returns, you’ll automatically be paying taxes according to the new tax regime. However, there is an option to choose the old tax regime if it suits you better.
To choose the old tax regime, you need to carefully evaluate your options and file your tax return by July 31st. If you miss this deadline, you will not be able to opt for the old tax regime for that year and will have to file under the new tax regime instead.
So, it’s crucial to decide early and file on time if you prefer the old tax regime’s benefits.
Can we switch back after choosing a regime?
It depends. For those without business or professional income, like many non-residents earning passive income, the choice is annual. They can weigh the benefits each year and switch between regimes accordingly.
However, for individuals with business or professional income, once they opt for the old tax regime, they’re locked in. While they can transition to the new regime, returning to the old one restricts them permanently.
So, it’s a one-way street for business owners or professionals. But for others, the door swings both ways annually. But remember, tax returns must be filed by July 31st each year, regardless of the chosen regime.
Tax Relief for Low Income: Who Qualifies Under Section 87?
Section 87 of the Indian tax regime provides a tax rebate of up to ₹25,000 for individuals in lower income brackets.
The maximum rebate of ₹25,000 is exclusively for residents, not non-residents. It’s applicable under both old and new tax regimes but limited to residents.
Choosing Between Tax Regimes: Finding Your Best Fit
For those in lower tax brackets, whether old or new, the impact remains unchanged. Similarly, for NRIs with income taxed at specific rates unrelated to slab rates, the choice between old and new regimes doesn’t alter much. However, for individuals in the very high tax brackets, around ₹2 crore, the new regime generally offers more benefits due to lower maximum tax rates. If you’re in the ₹7 lakh to ₹20 lakh bracket, conducting an impact study comparing old and new regimes can help minimize your tax burden. If navigating tax calculations feels daunting, seeking assistance from a commercial or chartered accountant is wise. Regardless of your approach, filing tax returns promptly is crucial to avoid future legal inquiries.
Feeling more informed about the old vs. new tax regimes? Now, when it’s time to file your tax return, you’ll know which direction to take.
As an NRI, have you ever wondered about the consequences of not filing your tax returns? Dive into this video: NRIs Beware: Unraveling the Consequences of Not Filing Tax Returns! to uncover all the benefits waiting for you!
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