New vs Old tax regime? How to optimise your tax planning for FY24

Let’s consider the case of Mr. Sharma, a salaried individual. Under the old regime, Mr. Sharma would opt for various deductions and exemptions available, such as those for house rent, children’s education, and medical expenses, to reduce his taxable income. He found this beneficial as it lowered his tax liability significantly. However, with the introduction of the new tax regime, Mr. Sharma realised that he would lose out on these deductions and exemptions but would be subjected to lower tax rates.

Differences between the new and old tax regime

The major distinction between the two tax regimes lies in the deductions and exemptions offered. Under the old regime, taxpayers can claim deductions under various sections of the Income Tax Act, such as 80C, 80D, and 24(b). These deductions significantly reduce the taxable income and subsequently the tax liability. In contrast, the new regime eliminates most of these deductions and offers lower tax rates.

Planning for FY24

To plan for the upcoming financial year, taxpayers need to carefully consider their financial situation and weigh the pros and cons of each tax regime. 

A new tax regime was announced both for corporates and individuals wherein the government announced reduced tax rates subject to for-go of certain deduction which ultimately led to simplified compliance and reduction of tax liability for certain class of assessee. 

For individuals with significant deductions and exemptions, the old regime may still be more beneficial as it allows them to reduce their tax liability substantially. On the other hand, individuals with limited deductions or those who prefer simplicity in tax calculations may find the new regime more appealing with its lower tax rates.

Aakanksha Goel, Direct Tax Partner, T R Chadha & Co LLP says “For individual assessment of old regime vs new regime is year on year exercise and the assessee can opt the regime whichever is more beneficial.  On a high-level working, the new regime will be advantageous when total deductions are less than 1.5 lakhs and the old regime shall be advantageous if total deductions exceed 3.5 lakhs. Further, the quantum of income shall also be a relevant factor since slab rates shall be applicable accordingly.”

“For corporations, the new regime can be opted only once and once opted, then it cannot be withdrawn and hence due care needs to be taken while adopting the new regime. There are various deductions/incentives such as 10AA/10A exemption, additional depreciation, 33ABA deduction, section 35 deduction, MAT credit, chapter VI-A deduction (barring section 80JJAA and 80M), losses of preceding years attributable to afore-stated deductions etc. hence due care must be taken to draw the projection of the company for 10 years or more to ascertain the impact of foregone of the eligible deductions vs. opting new tax regime,” Goel added. 

“Best thing to do will be to calculate your taxable income under both systems (calculators are easily available); opt for the one that reduces your tax liability the most. Remember to always align your choice with your financial goals and saving habits. For example: Do not give up your insurance policies just because they don’t give tax benefits under the new tax regime,” says Bhuvanaa Shreeram, Co-founder and Head of Financial Planning, House of Alpha. 

Swati Chavarkar, Head – Payroll outsourcing, Core Integra says “With effect from FY 2023-24 the new tax regime is the default option for taxpayers but in order to choose between the regimes, the basic guidance is whether one has sufficient deductions/exemptions permissible under old regime to reduce tax rates else the new regime offers lower tax rates by default but no deductions/exemptions. In general, for people with less than 15 lakhs taxable income, the new tax regime will be beneficial.”

To make an informed decision, taxpayers should analyse their income sources, expenses, and potential deductions to determine which regime aligns better with their financial situation. Consulting a tax advisor or using online tax calculators can also assist in comparing the tax liability under both regimes.

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Published: 11 Dec 2023, 09:57 AM IST