Choosing the Right Tax System: Guide to Optimal Tax Savings Before Filing Returns
For the fiscal year 2023-24, Income Tax Returns (ITR) will be filed until July 31st. There are two tax regimes available for filing ITR. If you opt for the old or existing tax system, you will only be taxed on income up to Rs. 2.5 lakh. Alternatively, under section 87A of the Income Tax Act, you can save tax on income up to Rs. 5 lakh.
Choosing the new tax regime means you will not be required to pay tax on income up to Rs. 3 lakh. Additionally, under section 87A, salaried individuals can avail tax relief on income up to Rs. 7.5 lakh, and others can get tax relief on income up to Rs. 7 lakh.
Understanding the Old Tax System
Let’s understand the old tax system with an example – According to Bhopal’s Chartered Accountant Kartik Gupta, suppose someone’s annual income is Rs. 5 lakh. Under the old tax system, income up to Rs. 2.5 lakh is tax-free. In this scenario, the individual would be liable to pay 5% tax on the remaining Rs. 2.5 lakh, which amounts to Rs. 12,500. However, the government provides relief on this tax under section 87A.
Additionally, if your income exceeds Rs. 5 lakh, you will be required to pay tax at a rate of 5% on the amount exceeding Rs. 2.5 lakh but not exceeding Rs. 5 lakh. For example, if your income is Rs. 5,01,000, you’ll pay Rs. 12,500 plus 5% tax on the additional Rs. 1,000.
Understanding the New Tax System
Suppose someone’s annual income is Rs. 5 lakh. Under the new tax system, income up to Rs. 3 lakh is tax-free. In this scenario, the individual would be liable to pay 5% tax on the remaining Rs. 2 lakh, which amounts to Rs. 10,000. However, the government provides tax exemption on income up to Rs. 7.5 lakh under section 87A in this regime.
Additionally, if your income exceeds Rs. 7.5 lakh and you’re not salaried, you’ll only pay tax at a rate of 5% on income up to Rs. 2 lakh. After availing the rebate under section 87A, the remaining income up to Rs. 5 lakh is tax-free, making the new tax regime more beneficial.
Difference Between Old and New Tax Systems
A new option was introduced in 2020 for filing Income Tax Returns. There are two options available for filing ITR since April 1, 2020. In the new tax slabs, the category of tax-free income has been increased from Rs. 2.5 lakh to Rs. 3 lakh, but deductions for tax savings have been removed. At the same time, if you choose the old tax slabs, you can avail various types of tax deductions.
One significant difference is that under the old tax system, after the rebate under section 87A, income up to Rs. 5 lakh is tax-free, whereas under the new system, income up to Rs. 7.5 lakh is tax-free.
Which tax system is suitable for you?
If you are salaried and your annual income is up to Rs. 7.5 lakh, then you can opt for the new tax regime, where you won’t be taxed at all. On the other hand, if your income exceeds Rs. 7.5 lakh and you’ve made significant investments that can provide tax benefits, then you may choose the old tax system.
Furthermore, you can use the income tax calculator available on the Income Tax Department’s website to easily calculate how much tax you’ll need to pay under different tax systems. Then you can choose the tax system that’s right for you. Besides, you can also seek assistance from a Chartered Accountant if needed.
