Income tax planning in FY25: Who should opt for old regime?

Taxpayers, beginning April 1, 2024, face an important decision regarding their income tax regime which would affect their financials.

If they do not inform their employers about their preferred tax regime, they will be automatically enroled into the new tax regime.

Hence, it is important that they choose the right income tax regime and plan their finances to reduce their tax burden as both tax structures offer different advantages and considerations.

Before settling in on an income tax regime, comparing the old and new tax regimes is important. Several key factors should be kept in mind before taking a call.

Here is a comparison before deciding on the income tax regime:

Exemption limit - Under the new tax regime, individuals can earn up to Rs 3 lakh tax-free, regardless of age. This exemption applies universally to all individuals who opt for the new regime.

However, the old tax regime has different exemption limits based on age.

"The basic exemption limit for an individual below 60 years of age is Rs 2.5 lakh in a financial year and for senior citizens aged between 60 and 80 years is Rs 3 lakh. For super senior citizens, aged 80 years and above, income up to Rs 5 lakh is exempt from tax," said Rajarshi Dasgupta, Executive Director, Taxation, AQUILAW. 

Tax rebates - The new tax regime offers a higher tax rebate compared to the old regime. With the new system, individuals can receive rebates of up to Rs 25,000, resulting in zero tax payable for incomes up to Rs 7 lakh.

"The old tax regime offers tax rebate up to Rs 12,500 which makes zero tax payable for net taxable income up to Rs 5 lah," said Dasgupta. 

Exemptions in tax - The old tax regime provides more tax exemptions and deductions than the new regime.

"Some of the examples of deductions available are Section 80C up to Rs 1.5 lakh for specified investments and expenditures; Section 80D for premiums paid for health insurance policies; Section 80CCD (1B) for additional investment in the National Pension System (NPS) up to Rs 50,000. Individuals can also claim deduction on interest paid on home loans for a maximum of Rs 2 lakh, deduction on interest paid on education loan as well as deduction on donations made. Apart from the deductions, an individual can claim tax exemption on house rent allowance (HRA) as well as leave travel allowance (LTA)," added Dasgupta.

However, the new regime offers only two deductions: a standard deduction of Rs 50,000 and a deduction for an employer's contribution to the NPS account.

Surcharge rates - There's a difference in surcharge rates between the two regimes. Under the new tax system, the surcharge rate is reduced from 37% to 25% for incomes over Rs 5 crore.

However, under the old regime, the surcharge rate remains at 37%, regardless of salary.

Which income tax regime to choose? 

Deepak Avasthy, Senior Manager of Corporate Tax at SW India, suggests that individuals with lower taxable incomes or substantial deductions may find the old regime more beneficial.

"Considering the benefit of lower tax rates available in new regime, the old regime will only be beneficial for individuals who have relatively lower taxable income or have significant deductions and exemptions available for adjustment," said Avasthy.