Old vs new Income Tax Regime - For employers

In this post, we will discuss about how to choose between the Old vs New tax regime.

The Finance Budget 2023 – 24 has proposed an alternate income tax structure. In this post, we see the pros and cons of the new system and the questions employers must address w.r.t the switch.

• Introduction
• Tax slab rates comparison
• Benefits of the new Tax Regime
• What goes out and what stays
• Pros and Cons of New Tax Regime
• Pros and Cons of Old Tax Regime
• Questions employers must address

Introduction

The Central Board of Direct Taxes (CBDT), via a circular dated April 1st 2023, clarified that employers will have to deduct TDS from salary for FY 2023-24 as per the tax regime chosen by the employee.

If an employee wants to go for the new tax regime he/she must inform the employer of this, else by default TDS would be deducted as per old regime tax rates.

Also, the employee makes the choice of the tax regime, and they cannot change it during the FY. However, an employee can switch the tax regime during the tax filing.

The taxpayers who opt for the new regime need to forego most of the exemptions and deductions availed under Chapter-VIA (like HRA, investments under Section 80C, NPS contribution, medical insurance premium and Leave travel allowance (LTA)

New Tax Slab Rates 2023-24 

Tax slab rates comparison

Now let’s see the Old vs New tax regime rate in the table given below:

Benefits of the new Tax Regime

Let us see if the new tax regime is beneficial for you or not. The tax has always been confusing for an average Indian. With 3 more tax slabs, it has made more confusing.

You don’t have to do a detailed calculation to estimate the tax liability under the new tax slabs.

Anyone claiming tax exemptions and deductions of more than Rs 3 lakh in a year will not gain from the new tax structure.

This threshold of Rs 3 lakh includes the standard deduction of Rs 50,000 for which no investment is required. All salaried taxpayers are eligible for this, which leaves only an additional deduction of Rs 2 lakh. Of this, Rs 1.5 lakh is taken care of by Section 80C investments.

The average taxpayer also claims an exemption for HRA or claims deduction for the interest paid on a home loan. There are other deductions such as the contribution to the NPS, the interest on education loans, treatment of illness, and disabilities.

There is also the small but widely claimed exemption of up to Rs 10,000 for savings bank interest under Section 80TTA.

What goes out and what stays

What goes out

Some exemptions and deductions you will not get in the new regime. Check the ones you are claiming now:

• Standard deduction – Rs 50,000.
• House rent allowance – Depends on salary structure and rent paid.
• Housing loan interest – Rs 3.5 lakh for affordable housing, Rs 2 lakh for others.
• Investments under Sec 80C – Rs 1.5 lakh.
• Leave travel allowance – Tax-free if claimed once in a block of two years.
• Food Coupons – Rs. 50 per meal per day
• NPS contribution – Rs 50,000.
• Medical insurance premium – Rs 25,000 (Rs 50,000 for parents and senior citizens).
• Savings bank interest – Rs 10,000 under Sec 80TTA
• Interest income (for senior citizens) – Rs 50,000 under Sec 80TTB
• Education loan interest – Interest paid for eight consecutive years.
• Disability of self or dependent – Rs 75,000 to Rs 1.25 lakh depending on the disability.
• Treatment of self or dependent for specified disease – Rs 40,000.

What stays

Around 50 tax exemptions have been left untouched in the Budget. This list includes:

• Standard deduction on rent – 30% of the rent received
• Agricultural income -No limit
• Income from life insurance – If insurance cover is 10 times the annualized premium
• Retrenchment compensation – Rs 5 lakh
• VRS proceeds – Rs 5 lakh
• Leave encashment on retirement – Rs 3 lakh (No limit for govt workers)

Pros and Cons of New Tax Regime

PROS – 

• It is flexible for the taxpayers to invest their money as they want. Under this scheme there are no specific rules to invest in any saving instruments, such as tax saving scheme and insurance that may not meet or alliance with the financial goal.

• As a taxpayer, employees will have the option to choose between the old or new tax regime which may be suitable for them.

CONS –

• Without any exemption and deductions, the taxable amount will be higher compared to during the old tax regime.

Pros and Cons of Old Tax Regime

PROS –

• It leads to investments for the future, such as for child education, marriage, medical and others.
• It introduced a savings culture in individuals over time by needing investments in particular tax-saving schemes.

CONS –

• Under the old tax, there are a limited number of tax-saving investments.
• Investment in the lock-in period gets impacted on liquidity.
• Evidence retention of deduction claims is difficult.
• Level of consumption possesses a committed amount of investments.

Old vs New Tax slab rate for Residential, individual aged below or above 60 and HUF for the FY 2022-23 to 2023-24

Questions employers must address

Do I still have to take a declaration from my employees?

If the employee wants to opt for the new tax regime, then he/she informs the employer through the declaration form. Then the employer can start deducting TDS monthly. The declaration is applicable for the entire FY 2022-23.

If the employee fails to inform the employer, they will be taxed as per the old regime. As a result, the annual claiming of exemptions and deductions will go on as earlier.

Can I let my employees change their choice in the middle or end of the year?

No, the employees cannot switch the tax regime during the middle or end of the FY. But they can choose whether to exercise it or not while filing the return. This is done by claiming or foregoing relevant deductions and exemptions.

Certain exemptions can only be claimed via the employer so these may not be available at the time of filing return. If the tax liability comes out lower, then the employee will have to claim a refund in the return.

When should I get my employees to opt between the two regimes?

The best time is the beginning of the year. So, if the employee should communicate his/her decision on the tax regime in the month of April, If not the employer will deduct TDS as per the existing/old tax regime

If the employee is already claiming deductions, like PF contribution under Section 80C, it is better for the employees to continue with the existing tax regime.

As per the new regime, the employee is liable to pay less tax, provided they forego their deductions and exemptions. Choose wisely to reap these benefits.
This post on the Old vs New tax regime comes to an end. Share your queries with us in the comment section.

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