Read Latest CBDT Circular On TDS On Salaries! What Is The New Income Tax Regime?

The Indian government introduced a new income tax regime in the 2020 budget. The new regime comes with lower tax rates and changes in tax slabs but eliminates exemptions and deductions. The new tax regime provides an option for taxpayers to choose between the old and new regimes. The choice is crucial as it affects the amount of tax one pays. If an employee fails to choose between the old and new tax regimes, the default option is the old tax regime. In other words, if the employee doesn’t fill the new tax regime option, the employer will continue to deduct tax as per the old tax regime, which has higher tax rates but also more exemptions and deductions.

The default option of the old tax regime means that the employee will not be able to take advantage of the lower tax rates in the new regime. Moreover, the employee will continue to pay taxes as per the old regime, which has higher tax rates. The new tax regime is more beneficial for taxpayers who do not claim many deductions and exemptions. The choice between the old and new tax regimes is applicable for each financial year. Therefore, the employee must exercise this option at the beginning of each financial year. If the employee fails to choose between the old and new regime in a particular year, the default option will be the old regime.

Tax Regime Change

It is essential to note that the option of the old or new tax regime is not available to all taxpayers. The option is available to salaried employees, pensioners, and individuals with income from other sources. However, taxpayers who have business income, professional income, or capital gains income are not eligible to choose between the old and new tax regimes.

If an employee fails to choose between the old and new tax regimes, it may also affect their investments. For instance, if an employee has invested in tax-saving instruments like Public Provident Fund (PPF) or Equity-Linked Savings Scheme (ELSS), they can claim tax deductions under the old tax regime. However, under the new tax regime, these deductions are not available. Therefore, the employee must choose the old tax regime to claim these deductions. 

Furthermore, the default option of the old tax regime may also affect the TDS deduction. The TDS or Tax Deducted at Source is the amount of tax deducted by the employer from the employee’s salary. The TDS rates differ between the old and new tax regimes. Therefore, if the employee fails to choose between the old and new tax regime, the TDS deduction may be higher or lower than the actual tax liability. It is essential to note that once the employee chooses the old or new tax regime, they cannot switch between the two regimes during the financial year. Therefore, the employee must make an informed decision while choosing between the old and new tax regimes.

Nirmala Sitharaman Budget Speech

Finance Minister Nirmala Sitharaman in her budget speech told that the new tax regime would be the “default” tax regime for income taxpayers from FY2023-24. However, this action will not make anything mandatory because all the taxpayers still had the option to choose the old tax regime for their income tax assessment, and if any doubt then, It simply meant that anyone who wanted to choose the old tax system would have to do so via the IT department’s portal; otherwise, they would automatically be taxed under the new system. 

Originally introduced in 2020-21, the new tax regime has now been revamped to ensure that no tax would be levied for income up to Rs 3 lakh. , if an employee fails to choose between the old and new tax regimes, the default option will be the old regime. The default option may affect the amount of tax the employee pays and their investments. The employee must make an informed decision while choosing between the old and new tax regimes, as the choice is applicable for each financial year. Therefore, it is advisable to seek professional advice to make an informed decision. Much information is yet to come, stay tuned with us to get more updates.