Understanding the Impact of the New Tax Regime on Salaried Individuals
Since the full-year Union Budget was presented in July 2024—after the general elections—most employees had already submitted their proposed investment declarations. Consequently, many declarations did not take into account the enhanced benefits announced under the new tax regime.
Investment Declarations and Income Tax Deductions
At the beginning of the financial year in April, employers typically ask employees to indicate the deductions and exemptions they plan to claim throughout the year. This process allows employers to estimate the income tax to be deducted from salaries during the financial year.
Tax-Savings Under Both Regimes
With Finance Minister Nirmala Sitharaman enhancing the new tax regime for FY 2024-25 by widening tax slabs and increasing the standard deduction, it is anticipated that many taxpayers will opt for this regime when filing their income tax returns. If you do decide to switch, you will be entitled to a refund of any excess tax deducted by your employer over the year. It’s important to note that salaried taxpayers can alternate between the old and new regimes annually.
Lack of HRA: Implications for the Old Regime
Following the revisions to tax slabs and rates, only those who claim substantial tax benefits—like the Rs 2 lakh home loan interest deduction under Section 24(b) or a significant house rent allowance (HRA)—may find the old regime more advantageous. Indeed, in many cases, HRA could be the deciding factor, as other deductions may not warrant the administrative burden and record-keeping required to benefit from the old regime.
Evaluating the Old Regime Benefits
Despite the seemly streamlined benefits of the new tax regime, some taxpayers might still determine that the old regime is more beneficial upon computing the tax payable under both frameworks. According to tax regulations, salaried individuals and pensioners without business income can shift between the two regimes every year.
How to Switch Regimes
Individuals and Hindu Undivided Families (HUF) using ITR-1 or ITR-2 do not need additional forms to opt in or out of the new tax regime. You can simply check the ‘Opting out of new regime’ option in your ITR forms. However, taxpayers filing ITR-3, ITR-4, or ITR-5 must submit Form 10-IEA if they have business income.
Staying Compliant with Filing Deadlines
If you decide to stick with the old regime, it is crucial to file your returns on time—the extended due date is September 15 this year. Failing to do so would result in losing this opportunity. Although you can file belated returns with a late fee of up to Rs 5,000 until December 31, 2025, you will not be able to select the old regime or benefit from tax-saver investments made throughout the year.
According to the income tax (I-T) department, the decision to choose the old tax regime must be made before the return filing deadline, which is July 31 under section 139(1) of the I-T Act. This rule, applicable from the financial year 2023-24, identifies the new minimal exemptions framework as the default regime. The I-T manual states, “The consequences of delay in filing returns include late filing fees, losses not getting carried forward, deductions and exemptions not being available.”
In summary, understanding your options within both tax regimes is vital for optimizing your tax liabilities and ensuring compliance with the necessary regulations. Choose wisely, and take advantage of the benefits available this financial year.
