April 1, 2024, marks the beginning of the new financial year i.e. 2024-25. However, the old income tax laws applicable last financial year (FY 2023-24) will continue to apply in FY 2024-25 as the government has not changed the income tax laws. It is possible that some changes in the income tax laws may be announced in the full budget to be presented by the new government after elections are over but till then the old laws continue.
April is an important month for salaried individuals from a tax planning perspective – for 2024-25 in this case. This is because salaried individuals are required to inform their respective employers of the tax regime – old or new – that they wish to opt for during FY2024-25 in April itself. The tax regime a salaried individual opts for will decide the amount of tax that the employer will deduct from his/her salary income during the financial year.
Also Read: Latest income tax slabs
As per law, the new tax regime is the default tax regime. If a salaried employee does not inform his/her employer about their choice of tax regime then tax from salary income will be deducted based on the income tax slabs under the new tax regime.
If a salaried employee does not choose the tax regime that minimises his/her tax payable at start of the financial year, it may lead to more tax being deducted from their salary income. This will reduce their take-home pay. They will have to wait till the next financial year to claim the income tax refund for excess tax paid in FY 2024-25.
The Central Board of Direct Taxes (CBDT) issued a circular in April 2023 clarifying how employers have to deduct TDS from salary. However, the CBDT circular is silent on whether an individual can switch between new and old tax regimes during the financial year for the purpose of TDS from salary. Usually, most companies don’t allow salaried individuals to switch their tax regimes (once chosen at the start) during the financial year for the purpose of TDS on salary. However, an individual can choose any tax regime while filing their ITR, irrespective of which one was chosen for TDS on salary.Also Read:How to switch from new to old tax regime or vice-versa
Income tax rules you must keep in mind when choosing the tax regime
A salaried individual must know the current income tax rules to analyse the pros and cons of both tax regimes before picking one.
If a salaried individual opts for the new tax regime for financial year 2024-25, he/she will not be able to claim most tax exemptions and deductions which are available in the old tax regime. The main rules of the new tax regime include:
a) Basic exemption limit of Rs 3 lakh is applicable irrespective of age of individual
b) Standard deduction of Rs 50,000 from salary income is available
c) Zero tax is payable if the net taxable income in the financial year does not exceed Rs 7 lakh
d) Employer’s contribution to Tier-I NPS account is available for tax break under Section 80CCD (2)
Income tax slabs under new tax regime
Income range (In Rs) | Income tax rate (%) |
0-3,00,000 | 0 |
3,00,001-6,00,000 | 5 |
6,00,001-9,00,000 | 10 |
9,00,001-12,00,000 | 15 |
12,00,001-15,00,000 | 20 |
15,00,001 and above | 30 |
On the other hand, if a salaried individual opts for the old tax regime for 2024-25, he/she will be eligible to claim many tax exemptions and deductions. If the old tax regime is chosen, then
a) Basic exemption limit will depend on age of the individual; Rs 2.5 lakh for those below 60 years, Rs 3 lakh for those between 60 to 79 years and Rs 5 lakh for those who are 80 years or above.
b) Common deductions such as Section 80C deduction of up to Rs 1.5 lakh, Standard deduction of Rs 50,000 from salary income, Section 80D deduction on health insurance premium paid, tax exemption on house rent allowance (HRA), etc, can be claimed, as applicable provided conditions related to these tax breaks are met.
c) Employer’s contribution to Tier-I NPS account is available for tax break under Section 80CCD (2). Apart from this, individual can also claim additional tax break of Rs 50,000 for NPS investment under Section 80CCD (1B)
d) Zero tax is payable if the net taxable income in the financial year does not exceed Rs 5 lakh
Income tax slabs under old tax regime
Income range (In Rs) | Income tax rate (%) |
0-2,50,000 | 0 |
2,50,001-5,00,000 | 5 |
5,00,001-10,00,000 | 20 |
10,00,001 and above | 30 |
The above income tax slabs are applicable for individuals below 60 years of age.
Click here to see the tax slabs applicable to different age groups under old tax regime.
Do remember that cess of 4% is leviable on the income tax payable under both old and new tax regimes. Further surcharge on tax payable in case of taxable income exceeding Rs 50 lakh is applicable under both regimes.
Choosing between old and new tax regime
To choose between old and new tax regime for the purpose of informing employer for TDS on salary, salaried individuals must first estimate their taxable income for 2024-25. Based on this, they have to calculate tax liability under both the tax regimes after taking relevant deductions and exemptions into account. Compare the tax liability under both the tax regimes and choose the option where tax payable is less.
If you are due for an increment in 2024-25, take that also into account when estimating the taxable income.
Here are some examples to understand how choosing wrong tax regime can lead to higher taxes deducted from your salary income. Suppose an individual is eligible to claim following deductions:
a) Standard deduction of Rs 50,000 under both the tax regimes
b) Section 80C deduction of Rs 1.5 lakh in old tax regime
c) Section 80CCD (1B) deduction of Rs 50,000 in old tax regime for NPS contributions.
In old tax regime, a salaried individual can claim total deduction of Rs 2.5 lakh. In new tax regime, a salaried individual can claim total deduction of Rs 50,000 only.
Gross Total Income (without reducing Standard Deduction u/s 16(ia)) | Total Deduction under Old Tax Regime | Total Taxable Income under Old Tax Regime | Total Tax Liability under Old Tax Regime | Total Deduction under New Tax Regime | Total Taxable Income under New Tax Regime | Total Tax Liability under New Tax Regime |
9,00,000 | (2,50,000) | 6,50,000 | 44,200 | (50,000) | 8,50,000 | 41,600 |
10,00,000 | (2,50,000) | 7,50,000 | 65,000 | (50,000) | 9,50,000 | 54,600 |
12,00,000 | (2,50,000) | 9,50,000 | 1,06,600 | (50,000) | 11,50,000 | 85,800 |
15,00,000 | (2,50,000) | 12,50,000 | 1,95,000 | (50,000) | 14,50,000 | 1,45,600 |
Source: RSM India
The table above shows that tax liability in old tax regime is higher than in new tax regime in all income levels. However, if a salaried individual claims other deduction such as HRA tax exemption, Section 80D deduction etc., it can happen that tax liability is lower in old tax regime vis-à-vis new tax regime. Hence, it is important for individual to compare estimated tax liability in both tax regimes before choosing tax regime for TDS on salary.
Remember, a salaried individual may receive capital gains due to sale of assets or dividends from equity shares and mutual funds during the financial year. These incomes usually cannot be estimated in advance. Hence, at the time of filing income tax return for FY 2024-25, compare the tax liability under both tax regimes based on actual taxable income. Based on the actual tax liability, choose the favourable tax regime and file the ITR accordingly.