Old & new tax regime: Resolving tax saving puzzle for FY24

NEW DELHI: The changes in the new tax regime as announced in the Budget will be applicable from the current financial year 2023-24. So, it is crucial for all taxpayers to plan well in advance, as the new tax regime has been made the default option.

It is to be noted that the tax deducted at source (TDS) will be decided as per the new tax regime if employees do not inform their employers about the tax regime they have opted for. Tax department allows a salaried individual to select either of the tax regimes for the purpose of TDS on salaries. After they have finalised the tax regime, they cannot change it during the financial year. However, they can choose another tax regime at the time of filing their income tax return.

Deciding old vs new regime
The government announced several changes in the new tax regime to make it more attractive. It is very important for the taxpayers to analyse both regimes to make a well-informed decision. The take-home salary will get affected if the salaried individual doesn’t do the right calculation. There is no change in the old tax regime, while in the new tax regime, income has been exempted up to R7 lakh per annum.

Further, standard deduction for salaried individuals has been introduced and surcharge on taxable incomes above R5 crore has also been reduced in the new regime. According to experts, it is pertinent for taxpayers to know the effective rate of tax, which is the actual amount of income tax paid on an individual’s taxable income. The simple way to calculate it is to divide the total tax expense by the total income earned during the year.

Know your effective tax rate
“One must know what is an effective rate of tax while planning one’s investment and tax. For a person who is earning an income between R50 lakh and R1 crore, the effective rate of tax could be between 24-31% under both the old and new tax regimes,” says Vivek Jalan, Partner, Tax Connect Advisory, a multi-disciplinary tax consultancy firm.

But those in the R15-50 lakh bracket, the difference in effective tax rates widens depending on the exemptions one is availing. Therefore, those in this income bracket need to do some analysis before deciding on the tax regime.

“Those earning between R15 lakh – R50 lakh can structure their salary in discussion with their employers so as to take maximum deduction under house rent allowance, deductions for medical expenses, deductions for gifts received from employers, etc,” says Jalan.

According to Atul Goel, partner in chartered accounting firm Atul Goel & Associates, if the taxpayer is availing maximum deductions provided under the old system, then tax savings will be more in the old regime. For example, if the employee with an annual income of R15 lakh per annum is getting benefit of HRA as well as Housing loan interest on satisfying applicable conditions then the effective tax rate will be 5.34% as compared with 9.67% in the new regime.

However, if the taxpayer has not taken any HRA or housing loan, then the new tax regime is better as the effective tax rate will come at 9.67% as against 10.19% under the old regime.

Weighing tax saving options
Meanwhile, CA Chetan Daga, Founder, AdvantEdge Consulting, says the choice of regime is dependent on the exemptions and deductions being availed by the employees. He says as a rule of thumb, an employee covered under the 30% tax slab and having exemptions of less than R375,000 is better off opting for the new regime.

“Also, the saving of income-tax should be seen along with the investment pattern and cash flow requirements of the employee.  Tax saving components entail either an expenditure or a monetary outflow blocked for a particular period of time,” Daga said.

The employee should compare the opportunity cost of blocking funds under a tax saving component as against his cash flow needs and the potential gain that he may earn by investing funds in a non-tax saving mode.  As such, the choice of tax regime is as much a tax query as it is a commercial query, he further added.