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New vs old tax regime: How to choose income tax regime for TDS on salary for FY 2023-24

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The changes in the Income-tax Act, 1961, that were announced in the Budget 2023 have come into effect from April 1, 2023. The changes will be applicable for FY 2023-24. Some of these make the new tax regime more attractive than the old tax regime.

The Central Board of Direct Taxes (CBDT) has issued a circular on April 6, 2023, clarifying how employers can deduct TDS (tax deducted at source) on salary payments for the current financial year. According to the circular, an employee continues to have the option of choosing between the old and new tax regime. However, if the employee does not inform the employer of an option, tax on salary will be deducted on the basis of the new tax regime.

Also Read: Can you change income tax regime for TDS on salary during financial year?

Do note that the income tax regime chosen for the purpose of TDS on salary has no impact on filing income tax return (ITR). At the time of filing an ITR, an individual can choose any tax regime irrespective of what was opted for at the time of calculating TDS on salary. In other words, an employee can choose a tax regime for TDS calculation and change it later while filing the tax return.

However, a salaried individual must consider certain factors while deciding which income tax regime to choose for TDS in salary.

New tax regime is default
As said earlier, an employer will deduct tax on your salary on the basis of the new tax regime if you do not inform the company of your preference. The new tax regime does not allow an individual to claim many tax exemptions and deductions.

It only allows the following deductions in the current financial year:
a) Standard deduction of Rs 50,000 from salary income
b) Deduction under Section 80CCD (2) for employer’s contribution to NPS account

Any other deductions and tax exemptions cannot be claimed by an individual under the new tax regime.

May lose out on certain tax exemptions
If the TDS on salary is deducted on the basis of the new tax regime, you may not be able to claim tax exemption on leave travel allowance (LTA) and food voucher via your employer. Tax experts are not sure if these tax exemptions can be claimed if you switch to the old tax regime while filing the ITR.

Also Read: Opting for new tax regime for TDS on salary? Issues you are likely to face while filing ITR

Saraswathi Kasturirangan, Partner, Deloitte India, says, « The CBDT in a notification dated June 26, 2020, has clarified that tax benefit on food coupons is not available to employees in the new tax regime. Therefore, if TDS on salary is deducted on the basis of the new tax regime, then salaried individuals will not be able to avail such tax benefit on food coupons. »

Usually, the food coupons an employer gives to an employee are considered to be part of the employee’s cost to company (CTC). They are considered exempt from tax under the old tax regime. According to the income tax laws, an employee can claim tax exemption of Rs 50 per day under the old tax regime.

Do note that there are no restrictions on claiming tax exemptions on other allowances and deductions while filing ITR. A salaried individual can claim deductions under sections 80C to 80U and tax exemption on house rent allowance (HRA) while filing the ITR, provided it is the old tax regime.

What about advance tax payments?
An individual is liable to pay for advance tax payments if the estimated tax liability after deducting TDS exceeds Rs 10,000 in the financial year.

« Irrespective of the tax regime opted for TDS on salary, one is liable to pay advance tax if eligibility criteria is met. If the advance tax payments are not made on time, then the individual is liable to pay penal interest at the rate of 1 % per month on the tax amount due. The income tax authorities may levy this interest if the overall advance tax amount payable is not fully paid due to a shortfall in TDS by the employer. Thus, if you opt for another tax regime at the time of filing the ITR – from what was opted for TDS on salary – penal interest may be levied on the advance tax amount, » says Kasturirangan.

Also Read: Why you need to choose income tax regime in April

Form 16 will not reflect tax exemptions, deductions
If the employer deducts tax on salary income on the basis of the new tax regime, the Form 16 issued by the employer will not reflect the tax exemptions and deductions that an employee is eligible for. Thus, manual calculations must be carefully done if the deductions and tax exemptions are claimed at the time of filing ITR.

Further, proof of tax deductions and exemptions must be kept handy, in case the income tax department asks you for it.

Opting for old tax regime is wise because
It makes sense to opt for old tax regime for TDS on salary because the employer will provide you with the break-up of tax exemption and deductions in the Form 16. Further, if you switch to new tax regime at the time of filing ITR, then calculating taxable income will be comparatively easier. In case you are unable to make specific investments during the financial year, then new tax regime, will help you in lowering tax outgo.

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