Income Tax: Old tax regime vs new tax regime and how to switch between the two? MintGenie explains

The default adoption of the new tax regime is a notable modification outlined in the Budget 2023. Its objective is to streamline the tax filing procedure and promote greater participation in the new regime, featuring reduced tax rates albeit with fewer deductions and exemptions. 

This implies that if you don't expressly select either the old or new regimes, your taxes will be computed under the new regime by default. Nevertheless, you have the flexibility to revert to the old regime at any time before the due date for filing your return for the applicable assessment year. The frequency of switches allowed is contingent on your profession.

Employees receiving a salary and business professionals have the option to transition between the old and new tax regimes annually. On the other hand, individuals falling outside these categories are permitted to switch between the old and new regimes only once in their lifetime.

Given the ongoing conversations about the interim budget and its implications, numerous taxpayers are showing a keen interest in understanding the process of transitioning between the old and new tax regimes to minimize their tax expenditures. If you are not yet acquainted with the consequences of transitioning between tax regimes, reverting to the old regime allows you to access the various deductions and exemptions offered under that system, even though it entails higher tax rates.

Also Read: Income Tax Budget 2024 Live Updates

Interpreting the old tax regime

The previous tax regime, alternatively referred to as the “old tax regime” or the “deduction-based regime”, provides an extensive range of deductions and exemptions, presenting potential advantages for taxpayers who can make effective use of them. The characteristics of the previous tax regime encompass:

• Extensive deductions and exemptions: With more than 70 options, including Section 80C offering a substantial limit of ₹1.5 lakh, these provisions have the potential to substantially decrease your taxable income and reduce your overall tax liability.
• Established system: It served as the primary tax regime for numerous years preceding the introduction of the new tax regime in 2020.
• Taxpayer discretion: Individuals retain the option to choose the old tax regime, even though the new regime is set as the default choice.

Factors to contemplate when selecting the old regime comprise:

• To derive greater benefits from the old regime compared to the new regime, it is essential to leverage a substantial portion of available deductions, typically surpassing 30-40% of your income.
• Handling and asserting multiple deductions can be burdensome, necessitating extra paperwork and possibly increased professional fees for tax preparation.
• Although deductions result in a reduction of taxable income, the old regime features slightly higher tax rates for specific income brackets when compared to the new regime.

Understanding the new tax regime

The introduction of the new tax regime in India in 2020 has undeniably brought about significant changes. Geared towards simplifying the process with reduced tax rates, it does, however, come at the expense of limited deductions and exemptions. Despite being the default choice in Budget 2023, the decision on whether it is the best fit still hinges on individual circumstances.

These are some of the pivotal modifications implemented in the new tax regime for the financial year 2023-24 (assessment year 2024-25). Here is a detailed breakdown of these aspects to consider before choosing the new regime.

• Elevated basic exemption limit and rebate: The basic exemption limit, which represents the income threshold below which no tax is due, has been raised from ₹2.5 lakhs to ₹3 lakhs in the new tax regime. Additionally, the tax rebate under section 87A has been raised from ₹5 lakhs to ₹7 lakhs. Consequently, income up to ₹7 lakhs is now effectively tax-free in the new regime.
• Restoration of basic deduction: The standard deduction of ₹50,000, previously applicable exclusively to the old tax regime, has now been incorporated into the new tax regime. This serves to further decrease the taxable income under the new regime.
• Reduced surcharge: The surcharge rate on income surpassing ₹5 crores has been decreased from 37% to 25% in the new tax regime. This results in a reduced effective tax rate for individuals with high incomes who choose the new regime.

Forms to switch between tax regimes

The Central Board of Direct Taxes (CBDT) has recently unveiled two fresh income tax return forms, namely ITR-1 (SAHAJ) and ITR-4 (SUGAM), applicable for the Assessment Year 2024-25. In the updated ITR Form 1, individuals can now choose their preferred tax regime. Additionally, for ITR-4, which is designed for individuals with business or professional income, taxpayers are required to submit Form 10-IEA to opt out of the new tax regime.

• ITR-1 (SAHAJ): This streamlined form is currently accessible for individuals with income from salary, a single house property, interest income up to ₹2 lakhs, and agricultural income up to ₹5,000. Notably, it now incorporates the provision to directly choose the tax regime (old or new) within the form.
• ITR-4 (SUGAM): Designed for individuals with business or professional income, or income from sources other than salary, house property, or agriculture. Nevertheless, taxpayers using ITR-4 who wish to opt out of the new tax regime must submit an additional Form 10-IEA.

These adjustments simplify the process of filing Income Tax Returns (ITR) for numerous individuals, concurrently providing clarity on the procedure for selecting between tax regimes.

How to switch between tax regimes?

Transitioning between the old tax regime and the new tax regime, and vice versa is not a complex process. By following straightforward steps during the income tax return filing, taxpayers can easily navigate the decision-making process between the regimes and make their selection accordingly.

Step 1: Choose between the old and the new tax regime.

Step 2: Verify if you meet the eligibility criteria.

Step 3: Choose the form from the aforementioned list accordingly. 

Step 4: If you are a salaried individual, access your ITR form (such as ITR-1 or ITR-2). Next, navigate to the section dedicated to selecting the tax regime. Choose the “New Tax Regime” option if it is suitable for you. Proceed to fill out the remaining sections of your ITR and submit the form.

Nevertheless, for individuals with business or professional income, download and fill out Form 10IE. Make sure to submit Form 10IE by July 31 of the assessment year. When filing your ITR, choose the “New Tax Regime” option.

In general, individuals with substantial investments, medical expenses, and other eligible deductions may find the old tax regime advantageous. Myriad alterations render the new tax regime more appealing to a broader spectrum of taxpayers, particularly those with lower incomes and individuals who don't avail themselves of numerous deductions under the old regime. Nevertheless, conducting a thorough analysis and comparing it with the new regime is essential to determine the optimal choice for your specific financial situation.