Income Tax: Choosing old tax regime is beneficial only when amount of deductions crosses THIS threshold

Income Tax: Those taxpayers who have already filed their income tax return (ITR) for FY 2024-25 could be waiting for the refund, whereas those who have yet to file their return could be staring at myriad problems. One of the key dilemmas they are perhaps facing relates to the choice of income tax regime: old or new.

Experts say that most taxpayers tend to go with the regime that they chose last year, or they make a decision based on their entitlement for deduction. For instance, if some taxpayers have made investments in some tax-saving instruments, which entitle them to claim 80C deductions, they prefer to go with the old tax regime. Conversely, they choose a new tax regime when there are no such deductions. But is this plan of action advisable?

Perhaps not – advice experts.

₹4 lakh threshold

Chirag Chauhan, a Mumbai-based chartered accountant, tells Livemint that the minimum threshold of deductions at which it is rational for taxpayers to opt for the old tax regime is ₹4 lakh, and anything below that is not.

“If the total deductions that can be claimed under 80C, 80D, and others are lower than ₹4 lakh, then the new tax regime (and not the old) would lead to lower tax liability. Conversely, when total tax deductions are more than ₹4 lakh on account of HRA and deductions, then it is recommended to choose the old tax regime. But more often than not, these deductions are lower than this amount,” says CA Chauhan.

New tax regime vs old tax regime

He further explains that several taxpayers are not even aware and are surprised when they are apprised of this. “We came across several taxpayers who do not even bother to find out their total tax liability under these tax regimes. Ideally, we advise everyone that taxpayers should first check their total tax liability under both regimes before choosing one,” adds Chauhan.

Taxpayers can, therefore, visit the tax calculator to compute tax liability under both regimes to decide which regime is better. Tax calculator (image shown below) can be accessed on this link.

For the unversed, the new tax regime allows taxpayers to file returns under concessional rates but without claiming tax deductions. The old tax regime, on the other hand, has relatively higher tax rates, but it permits taxpayers to claim a range of deductions.

For all personal finance updates, visit here