As the new financial year approaches, taxpayers are faced with the dilemma of choosing between the old and new tax regimes introduced by the Indian government in 2020. The decision hinges on various factors, and a clear understanding of the distinctions is crucial.
The central difference lies in deductions and exemptions. The old regime permits claims under sections like 80C, 80D, and 24(b), significantly reducing taxable income. Conversely, the new regime trims deductions but offers lower tax rates. Individuals need to carefully assess their financial circumstances to optimize tax planning.
Consider the case of Mr. Sharma, a salaried individual. Traditionally, he leveraged deductions for house rent, children’s education, and medical expenses to lower his tax liability. However, the new regime poses a dilemma as it eliminates these deductions while proposing lower tax rates.
For planning in FY24, taxpayers should weigh the pros and cons of each regime based on their financial situation. Aakanksha Goel, Direct Tax Partner at T R Chadha & Co LLP, suggests that individuals should annually evaluate the benefits of the old versus new regime. Generally, the new regime is advantageous when total deductions are under 1.5 lakhs, while the old regime prevails if deductions exceed 3.5 lakhs, factoring in income levels and slab rates.
Corporates, too, face considerations. The new regime, once adopted, is irreversible, and careful evaluation is crucial. Assessing the impact of foregone deductions over the long term is necessary for accurate projections. Swati Chavarkar, Head of Payroll Outsourcing at Core Integra, notes that the new tax regime is the default for taxpayers from FY 2023-24. For those with taxable income under 15 lakhs, the new regime is generally beneficial.
Bhuvanaa Shreeram, Co-founder and Head of Financial Planning at House of Alpha emphasises aligning choices with financial goals. The decision-making process should not compromise essential financial habits, like maintaining insurance policies that might not offer tax benefits in the new regime.
In conclusion, taxpayers must conduct a thorough analysis of income sources, expenses, and potential deductions. Seeking advice from tax advisors or using online calculators can aid in comparing tax liabilities under both regimes. With the new financial year beckoning, an informed decision ensures that individuals and corporations optimize their tax planning strategies effectively.
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