Old or new tax regime for TDS on salary? This post-election 2024 event will impact your tax planning

This year, the government presented an interim budget in February 2024 due to the upcoming Lok Sabha elections, which are to be held between April and June, 2024. In the interim budget speech, Finance Minister Nirmala Sitharaman said, “As for tax proposals, in keeping with the convention, I do not propose to make any changes relating to taxation and propose to retain the same tax rates for direct taxes and indirect taxes, including import duties.” Therefore, as of now the income tax laws are the same for FY2024-25 as in FY2023-24.

However, because no changes were made in tax laws in the interim budget, there are expectations that the government may announce changes in income tax laws when it presents the full budget – likely in June or July, 2024, – for the current FY, 2024-25. Some or more of the tax proposals may be applicable retrospectively from April 1, 2024.

However, salaried individuals have to choose their income tax regime in April,2024 for the purpose of tax deduction from salary income by their employers. Usually, the tax regime chosen for TDS on salary remains the same for the financial year.

How should salaried individuals choose a tax regime for TDS on salary now when it is likely that income tax laws may be changed in the full budget later?

Shalini Jain, Tax Partner-People Advisory Services, EY India, says, “Financial year 2024-25 is unique in the sense that there are two budgets for the said year. Unless any clarification is issued by the tax authorities, employees may still need to decide on the tax regime at the beginning of the year (April 2024) by assessing which (old or new tax regime) is more beneficial for them based on their total income and exemptions and deductions. Also, it is seen that the government’s intention is to make the new tax regime more attractive with every budget. Therefore, one may bear that in mind while making the decision.”

According to a Central Board of Direct Taxes (CBDT) circular of April 2023, an employee is required to choose between the old and new tax regime and inform the employer of the choice at the start of the financial year. If no communication is made, the employer will deduct the taxes from salary income based on the income tax slabs of the new tax regime. This is because the new tax regime is the default tax regime from April 1, 2023.The CBDT circular is silent on whether an individual can change the tax regime during the financial year for TDS on salary. But income tax laws allow an individual to choose any tax regime while filing income tax return irrespective of what was communicated to the employer for calculating TDS on salary.Aarti Raote, Partner, Deloitte India, says, “Many employers do not permit any changes in the tax regime that is opted by the employee in April. Given that this year we will have the final budget after April, the only option left for an employee is to proceed on the basis of the current provisions and choose a regime that suits him the most. In the unlikely event the finance minister does provide significant changes in employment taxation, the employee shall always have the option of making a change when filing the tax return and choosing the regime that suits him the best at that time.”

The government presented an interim budget in February 2024 due to the upcoming Lok Sabha elections, to be held between April and June, 2024. In the interim budget speech, Finance Minister Nirmala Sitharaman stated that there would be no changes in tax proposals, keeping the tax rates unchanged for both direct and indirect taxes, including import duties. Therefore, the income tax laws for FY2024-25 remain the same as in FY2023-24.

Despite the lack of changes in tax laws in the interim budget, there is anticipation that changes may be announced in the full budget in June or July, 2024, for the current FY 2024-25. Some of these tax proposals may apply retrospectively from April 1, 2024.

Salaried individuals must select their income tax regime in April, 2024, for tax deduction from their salary income by their employers. Typically, the chosen tax regime for TDS on salary remains the same for the financial year.

How should salaried individuals choose a tax regime for TDS on salary now, considering potential changes in income tax laws in the upcoming full budget?

Shalini Jain, Tax Partner-People Advisory Services, EY India, explains that FY 2024-25 is unique due to having two budgets. Until clarification is issued by tax authorities, employees need to decide on the tax regime at the start of the year (April 2024) based on what is more beneficial for them. The government aims to make the new tax regime more attractive with each budget, which should be taken into account when making a decision.

According to a CBDT circular from April 2023, employees must choose between the old and new tax regimes and inform their employer at the beginning of the financial year. If no choice is made, the employer will deduct taxes based on the new tax regime’s income tax slabs. While the circular is silent on changing tax regimes for TDS on salary during the financial year, individuals can choose any regime when filing their income tax return regardless of what was communicated to the employer.Aarti Raote, Partner, Deloitte India, suggests that employees proceed based on current provisions and choose the regime that best suits them until the final budget is announced after April. In the event of significant changes in employment taxation, individuals can change their regime when filing their tax return to choose the best fitting regime at that time.