During this phase of the fiscal year, your employer will request evidence of investments and expenditures.
As the calendar year approaches its end, employers will soon request evidence of your qualifying investments and expenditures to reconcile your tax liability by the end of March. This is an ideal time to review your tax choices, especially the decision between the new and old tax regimes.
Typically, employees communicate their preferred tax regime to employers at the beginning of the fiscal year. However, this choice isn't binding, as it can be revisited until the final decision is made during the income tax return filing.
So, how do you decide between the new and old tax regimes? The new tax regime has six income slabs with a basic exemption limit of Rs 3 lakh. It also offers a lower surcharge (25%) for income above Rs 5 crore compared to the old regime (37%). In the new regime, tax rebate limits have increased to Rs 7 lakh, making it advantageous for those with fewer claimable investments.
The new regime is suitable for individuals with fewer deductions, while the old regime is favorable for those eligible for various deductions like HRA, health insurance, interest on home loans, and 80C deductions such as PPF, EPF, insurance, and Equity Linked Saving Schemes. Taxpayers should carefully consider the exemptions foregone in the new regime before making an informed decision.
As an illustration, the computation reveals that if a deduction of Rs 3.75 lakh is claimed (excluding a standard deduction of Rs 50,000), the tax liability remains constant for a gross income of Rs 15.5 lakh and beyond. Therefore, if you possess deductions such as those related to a home loan, health insurance, and 80C investments combined, you might experience a lower tax liability under the old tax regime. For incomes below Rs 15.5 lakh, there are varying breakeven deduction points. Utilizing online income tax calculators can aid in comparing liabilities under both regimes and determining the most advantageous option.
If you don't make a selection, the new tax regime is automatically chosen. This may result in a tax notice if you later opt for deductions when filing your ITR. For instance, if an employee fails to declare their preferences to their employer (resulting in the default selection of the new tax regime) and subsequently claims substantial deductions under 80C and HRA while filing their income tax return, the income in Form 26AS will not align with the income tax return. As a consequence, the employee may receive a notice under section 142(1) requesting information due to the mismatch in tax credit. Typically, notices for discrepancies in tax credit are issued under section 154.
