Old tax regime vs new tax regime: Know how to switch between these two systems

Finance Minister Nirmala Sitharaman said in the Union Budget 2023 that the new tax structure would be the default choice for income taxpayers. This means that if an individual forgets to register their preference between the new and old tax regimes, their income tax will be calculated as per the new tax regime. However, anyone who wishes to return to the previous tax regime can do so, although the number of times they can change the regime is determined by their type of profession.
 
Meanwhile, Sitharaman will announce the Interim Budget 2024 on February 1.
 
In this article, we will discuss the old and new tax regimes and how you can switch between the two.
 
What is the old tax regime?
The old tax regime is the taxation system that provides around 70 deductions and exemptions to help reduce your taxable income. It also enables a deduction of Rs 1.5 lakh under Section 80C of the Income Tax Act (covered by 70 deductions). It existed before the implementation of the new tax regime, and a taxpayer can still adopt it.
 
What is the new tax regime?
The new tax regime was launched in 2020. This regime has lower tax rates than the previous regime and was implemented to streamline taxes. There are no deductions or exclusions available, except the deductions under Sections 80CCD(2) and 80JJA (eligible for business income). The new tax system is now the default regime, according to Budget 2023.
 
The basic exemption limit has been increased under the new tax regime, and the rebate has also been increased to Rs 7 lakh. The basic deduction has been reinstated under the new tax structure, and the surcharge has been reduced.
 
How to switch between old and new tax regimes while filing an ITR?
It depends on the type of income and how many times you want to switch between these two regimes. But definitely, you can change the regime as per your choice.
 
Salaried Individual
A salaried individual can choose between the new and old tax regimes each fiscal year. While the new tax system will be the default tax regime in FY 23-24, people can revert to the previous regime based on their income.
 
Businessman or Professionals
Individuals can transfer between the old and new regimes, but those with a company or professional income are not entitled to do so more than once. For example, if a businessman transfers from the old to the new regime in Fiscal Year 2023, they will be unable to switch again. Individuals with company income who opt out of the new tax regime will be unable to opt in again in the future.
 
How to switch tax regimes?
Follow these steps to change your regime while filing an income tax return.
 
Step 1: Select an old or new tax regime.
Step 2: Check your eligibility.
Salaried individuals can pick either regime directly on your ITR form, eliminating the need for extra paperwork.
Individuals with business/professional income can only move regimes once in their lifetime and must complete Form 10IE by July 31 of the assessment year.

Step 3: Follow these things after fetching eligibility.

For Salaried Individuals:

• Open your ITR form (e.g., ITR-1 or ITR-2).
• Locate the section for choosing the tax regime.
• Select the "New Tax Regime" option if applicable.
• Complete the remaining sections of your ITR and submit it.

 
For individuals with business/professional income:

• Download and complete Form 10IE.
• Submit Form 10IE by July 31 of the assessment year.
• File your ITR by selecting the "New Tax Regime" option.

 
Switching to the Old Regime:

• This option is only accessible if you haven't switched previously.
• Download and complete Form 10IE.
• Note: You cannot claim deductions or exemptions allowed under the previous regime on your current year's return.
• File your ITR without specifying a certain regime.

 
Check and submit:

• Check your ITR details carefully.
• Use Aadhaar OTP or PAN, as well as bank data, to electronically authenticate your ITR.
• After you've chosen your desired regime, submit your ITR electronically.

Which tax regime is better for higher income (above Rs 10 lakh) and lower income (below Rs 10 lakh)? Is there a provision to save tax in the new tax regime?

According to Mihir Tanna, associate director - direct tax, S K Patodia & Associates LLP, "As per the substantial change in the new tax regime in Finance Act 2023, taxpayers are encouraged to opt for the new tax regime without forgetting the importance of savings, insurance etc. 

From FY 2023-24, the new tax regime became the default regime but taxpayers can opt for the old tax regime if it is more beneficial. After a change in slab rate and allowability of specified deductions/exemptions; the quantum of deduction will decide which tax regime is more beneficial to taxpayers.

Under the new tax regime,
- Standard deduction of Rs 50,000 to a salaried person.
- Interest deduction for home loan taken for letting out property.
- Deduction for employer's contribution to NPS.
- Exemption of VRS, Gratuity, and LTA with specified conditions.
- family pension deduction of Rs 15,000 or 1/3rd of pension (whichever is lower); is also available.

Accordingly, in case a taxpayer earns a gross income of Rs 10,00,000; the new tax regime is likely to be beneficial if the total deduction is less than Rs 2,62,500. Similarly, in case a taxpayer earns a gross income of Rs 15,00,000; the new tax regime is likely to be beneficial if the total deduction is less than Rs 3,75,000. However, for taxpayers earning a gross income of Rs 15,50,000; both regimes are equal, considering the total deduction of Rs 3,75,000."