There is a rumour in many places that if a taxpayer has once chosen the New Tax Regime, then he cannot choose the Old Tax Regime even if he wants to. But such news is just a rumour and is not completely true.
Last year, during the speech of Budget 2023, Finance Minister Nirmala Sitharaman had given complete exemption from tax to taxpayers with annual income less than ₹ 7 lakh to provide relief in income tax to the middle class, whereas before that this exemption was available only to those whose annual income was less than ₹ 5 lakh. The most important and noteworthy point in this relief announcement was that this exemption is to be given only to those taxpayers who will adopt the new tax regime and leave the old tax regime.
One more thing is worth noting that this exemption will be given only while accounting for the income of the financial year 2023-24, i.e. while filing ITR. However, for those taxpayers who invest in small savings schemes, or have bought life insurance policies and are paying premiums, or have opened a PPF account, or have taken a home loan for their house, or get HRA exemption in house rent allowance by living in a rented house, the old tax system is considered better. Broadly speaking, for those taxpayers who get a total of ₹ 3 lakh or more exemptions or deductions in different items apart from standard deduction, the old tax system will be better. Therefore, when you file ITR, i.e. Income Tax Return, you should choose the beneficial tax system only after doing a complete calculation.
Clear this misunderstanding…
There is a rumour in many places that if a taxpayer has once chosen the New Tax Regime, then he cannot choose the Old Tax Regime even if he wants to. But such news is just a rumour and is not completely true. The reality is that as per the rules, only business class taxpayers, who are not salaried or pensioners, will not be able to return to the old tax regime once they choose the new tax regime. The option to choose the new or old tax regime will be available every year for the salaried class, that is, despite choosing the new tax regime once, if he wants, he can return to the old tax regime next year.
What was the actual announcement…?
In the year 2020, the Finance Minister had announced the new tax regime under Section 115BAC of the Income Tax Act from the financial year 2020-21, i.e. Assessment Year 2021-22. At that time also the income tax slabs declared under the new system were quite beneficial, i.e. in the new tax regime the tax rates were kept quite low even for large incomes, but there was no provision for getting any kind of exemption or deduction in this system. The old tax system was kept intact, in which zero tax had to be paid on income up to Rs 2.5 lakh, 5 percent tax on income from ₹2.5 lakh to ₹5 lakh, 20 percent tax on income from ₹5 to ₹10 lakh and 30 percent tax on income more than ₹10 lakh. These slabs are exactly the same even today in the old tax system.
Income tax slabs in the new tax system…
As per the announcement made in the budget of the year 2020, according to the tax slabs created in the new tax system, there was zero tax on income up to ₹2.5 lakh, 5 percent on income from ₹2.5 to ₹5 lakh, 10 percent on income from ₹5 to ₹7.5 lakh, 15 percent on income from ₹7.5 lakh to ₹10 lakh, 20 percent on income from ₹10 to ₹12.5 lakh, 25 percent on income from ₹12.5 lakh to ₹15 lakh and 30 percent tax on income above ₹15 lakh, but now the tax slabs of the new tax system have been changed, and now the amount of tax-free income has been increased from ₹2.5 lakh to ₹3 lakh. Due to this, those who adopt the new tax system will have to pay 5 percent tax on the next ₹3 lakh, i.e., on income from ₹3 lakh to ₹6 lakh, 10 percent tax will be levied on income from ₹6 to ₹9 lakh, ₹15 percent tax will be levied on income from ₹9 to ₹12 lakh, and 20 percent tax will have to be paid on income from ₹12 to ₹15 lakh. As before, 30 percent tax will have to be paid on income above ₹15 lakh.
Income up to ₹7 lakh tax free in NTR…
As per the announcement made in the year 2020, apart from the tax slabs, in both the tax systems, in case the annual income was less than ₹5 lakh, taxpayers were given exemption under Section 87A of the Income Tax Act, due to which the entire tax liability of the taxpayer was eliminated, that is, those whose income was less than ₹5 lakh did not have to pay any income tax. It is also worth noting here that if the income is more than ₹5 lakh, then income tax has to be paid as per the slab applicable on the entire amount above ₹2.5 lakh, whether you have chosen the old tax system or the new tax system. But then through the announcement made in the budget of the year 2023, along with the tax slabs, the exemption limit under Section 87A was also changed. Now taxpayers who are going to file ITR for the financial year 2023-2024 will be able to get the benefit of this. They will now be given full tax exemption on income up to ₹ 7 lakh instead of ₹ 5 lakh, but its benefit will be available only to those who adopt the new tax system. Those who remain in the old tax system will have to pay income tax as soon as their income exceeds ₹ 5 lakh.
So, keep in mind, the old tax system will still be better for those who get savings on income under section 80C of Income Tax Act (life insurance, PF, PPF, children’s school fees, principal refund in home loan etc.), savings made under NPS, exemption of house rent allowance (HRA) and interest paid on home loan, but for all the rest, choosing the new tax system will be beneficial.
