New Personal Tax Regime is now default one. consequence/precautions before filing ITR

New Personal Tax Regime made default one. Consequence and precautions to be taken by assessee before filing ITR for AY 2024-25 who wish to follow old tax regime.

The Finance Act 2020 had introduced Personal Tax Regime under section 115BAC of the Income Tax Act, 1961 (the Act) w.e.f. Assessment year 2021-22. As introduced, under the Personal Tax Regime there were seven slabs with 5% as the lowest rate of tax and 30% being the highest one.

Against Personal Tax Regime, in the traditional taxation scheme (or old tax regime) tax exemption limit is Rs. 2.50 lakhs with three slabs and 30% being the maximum rate of tax.  

The Union Budget 2023 has proposed to make the the Personal Tax Regime under section 115BAC as the default one w.e.f. AY 2024-25.

Precautions to be taken by taxpayers to avoid undesired tax burden in view of Personal Tax Regime u/s 115BAC now becoming the default tax scheme

Operation of Personal Tax Regime for AY up to 2023-24

In the original scheme, the assessee were given an option for the Assessment Year 2021-22 onwards to choose the New tax Regime. 

The said option was to be exercised by way of electronically filing Form 10-IE (Application for exercise or withdrawal of option of New tax Regime.

As per the original New Tax Regime, the option once exercised for any year can be withdrawn only once for a year other than the year for which the option was exercised and thereafter such taxpayer shall never be eligible to exercise the option again.

Impact of Personal Tax Regime from AY 2024-25 onwards:

The Union Budget 2023 with the enhancing the exemption limit to Rs. 7 lakhs, section 87A rebate to Rs. 25000/- and reducing tax slabs to five, proposes to make the Personal Tax Regime u/s 115BAC default one.

However, there might be cases where for the AY 2024-25, a taxpayer stands to gain in income tax in old tax regime by comparing the tax incidence in traditional tax scheme as compared to Personal Tax Regime as under:

Example:

However, the implication of making the Personal Tax Regime the default tax scheme would have the following implications which the taxpayers should keep in mind:

(i) Unless and until, the taxpayer exercises option to stay with old tax regime, he/she shall be automatically subjected to tax slabs and rates and other provisions of Personal Tax Regime with no claim for deductions as provided.

(ii) The said option has to be exercised in through his account in income tax e-filing portal via electronic mode in Form No. 10IEA.

(a) on or before the due date for filing the return of income for those having income from business or profession, and such option once exercised shall apply to subsequent assessment years; or

(b) For those not having income from business or profession, at the time of filing of return of income within prescribed due date for filing of ITR.

The option to opt old tax regime once exercised can be withdrawn only once for the year other than the year in which it was exercised and thereafter, the person shall never be eligible to exercise the option except where such person ceases to have any income from business or profession. 

CBDT has issued Circular No. 04 of 2023 dated 5th April 2023 in suppression of Circular C1 of 2020 dated 13th April 2020 . The Circular directs that a deductor, being an employer, shall seek information from each of its employees regarding their intended tax regime and each such employee shall intimate the same to the employer regarding his intended tax regime for each year and upon intimation, the deductor shall compute his total income, and deduct tax at source thereon according to the option exercised.

If intimation is not made by the employee, it shall be presumed that the employee continues to be in the default tax regime and has not exercised the option to opt out of the new tax regime. Accordingly, in such a case, the employer shall deduct tax at source, on income under section 192 of the Act, in accordance with the rates provided under sub-section (1A) of section 115BAC of the Act.

The said Circular has further clarified that the intimation so made to the employer shall be only for the purposes of TDS. However, the intimation would not amount to exercising option choosing a particular Tax Regime and the person shall be required to do as mentioned before. Thus, option to be exercised could be different from the intimation made by such employee to the employer for a particular year.

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