Old tax regime Vs New Tax regime: Why it is crucial to declare the tax regime now?

ITR filing: In Budget 2023, the government proposed several changes in the tax slab and rate which are applicable for FY2023-24. As the month of April is the beginning of the new financial year, it comes with many tasks that salaried employees must take into consideration, one of them being informing their employer about which tax regime they will be opting for during the new financial year.

Salaried employees can opt out of the New Tax Regime every year to enjoy the benefit of various deductions; however, they must make their choice now so that their employer does not charge additional withholding taxes from their monthly salary in the fiscal year 2023-24. That being stated, here are five reasons why taxpayers should hurry up and inform their employer of the tax regime they prefer:

1. As the New Tax Regime is now the default option for the fiscal year 2023-24, failing to declare employees' preferences now would result in the employer deducting TDS as per the new tax regime. In this situation, the employer will not use deductions available under the Old Regime while calculating employees withholding taxes for FY 2023-24, which could affect their monthly income. Thus,  employees must pick between the existing and new tax regimes now.

2. While employees have the option of switching their tax regime choice during the submission of the Income Tax Return (ITR), not informing the employer can cause issues. For example, if the taxpayer did not choose the old tax regime at the start of the year, they will not be able to claim deductions such as HRA or LTA when completing their ITR, even if they did choose the previous regime. In this instance, the employer may choose not to incorporate these deductions in the salary structure.

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3. The Income Tax Department recently released a circular requesting employers to obtain information from employees regarding their preferred tax regime. If the employee fails to specify his or her preference, it will be presumed that the employee is in the New Tax Regime, and TDS under Section 192 will be deducted according to the new regime rates.

4. According to the Income Tax Department, an employee can select their tax regime only once in any given fiscal year. After then, the employee will be unable to change the regime.

5. Employees with a salary income of up to Rs 7.5 lakh will be unaffected if they do not choose a tax regime as the default New Tax Regime will apply to them. Furthermore, under the New Regime, income up to Rs 7 lakh is tax-free. With this and a standard deduction of Rs 50,000, income of up to Rs 7.5 lakh is tax-free under the New Regime. Other employees with higher wages, on the other hand, must declare their preference in order to benefit from several other deductions provided under the Old Tax Regime.

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