The importance of selecting tax regime on time
PremiumUnless you opt for the old tax regime, the new regime will be considered the default option
It’s the beginning of a new financial year and employers have started rolling out the tax declaration form for employees. For salaried people, the option of selecting between old and new tax regimes is available every year. At the time of filing the Income Tax Return (ITR) also, they can switch from old to new regime or vice versa, whichever is more beneficial.
Do note that certain deductions and exemptions are available under the old regime but not the new one. With effect from 1 April, unless you specifically opt for the old regime, the new regime will be considered the default option and accordingly, TDS (tax deducted at source) will be computed by the employer. Suppose, you do not specifically choose the old regime but decide to opt for it at the time of filing ITR, you can at that point of time still claim certain deductions like those available under sections 80C and 80D, housing loan interest, etc., even if these have not been declared to the employer. However, there are some exemptions that you may not be able to claim if they are not a part of your salary structure.
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For example, Sneha doesn’t specifically opt for the old regime and declares the same to her employer. So, the employer computes her tax as per the default new regime. Since there are no allowances exempt in the new regime, the employer does not consider house rent allowance (HRA), leave travel allowance (LTA), etc., in her salary structure. Accordingly, her employer deducts tax at source. Now, Sneha realizes that she wants to claim HRA exemption. An employee is eligible for this exemption based on these conditions: a) the HRA given by the employer; b) it constitutes 50% of the salary if the employee lives in any of the metro cities (Delhi, Mumbai, Calcutta, Chennai), or 40% of the salary for non-metro cities; and c) it comprises the actual rent paid minus 10% of the salary.
Since Sneha’s employer did not consider HRA as part of salary structure while computing her tax, she will not be eligible for this exemption. Had Sneha specifically opted for the old regime, she would have been able to claim the allowance. This also applies to other exemptions such as LTA.
It’s noteworthy that employees are not eligible for the old regime option if the ITR is not filed within the given timeline. For instance, Riya opts for the old regime and her TDS is ₹140,400. Riya, however, does not file her ITR on time. Since the time to opt for the old regime expires, Riya’s tax liability will be mandatorily determined on the basis of the new regime. She will not be eligible for exemptions /deductions available under the old regime. So, her taxable income will increase significantly and there will be tax liability of ₹1.95 lakh, over and above the TDS deducted, which she will have to pay along with interest and penalty.
It’s therefore important to declare to your employer about your option of either the old or new regime. It is also crucial to file your tax return on time.
Nitesh Buddhadev is a chartered accountant and founder of Nimit Consultancy.
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