Some individuals opt for the new regime without a comparative analysis of the tax liability under the two regimes.
A study of 1,865 information technology professionals, conducted by 1 Finance, found that 68 per cent of them could have saved an average of Rs 49,094 in taxes in the financial year 2024-2025.
As many as 33 per cent selected the wrong tax regime.
Among them, 86 per cent should have switched from the old to the new regime, while the rest would have gained by opting for the old regime.
Changes in Budget 2025
Budget 2025 introduced significant enhancements to the new tax regime.
"The income between Rs 4 lakh and Rs 8 lakh is taxable at 5 per cent. This rate increases by 5 percentage points for each Rs 4 lakh increment. The rebate under Section 87A was increased to Rs 12 lakh," says Preeti Sharma, partner, global employer services, BDO India.
"Including the standard deduction of Rs 75,000, there is zero tax if salary income is up to Rs 12.75 lakh." adds Sharma.
These changes, she points out, have exempted many individuals from tax, making the new regime attractive.
Shefali Mundra, tax expert, ClearTax, is of the view that the old regime may still suit those with substantial deductions.
"The changes reduce the need for complex documentation and for investing in traditional tax-saving investments," says Niyati Shah, vertical head - personal tax, 1 Finance.
Choosing the right regime
Income level should be the primary consideration.
"The new regime has become attractive for those with taxable income up to Rs 12.75 lakh due to enhanced rebate and standard deduction," says Mundra.
Another key criterion should be the level of deductions that taxpayers can avail.
"If you have substantial eligible deductions, the old regime might reduce your tax liability more effectively," adds Mundra.
Taxpayers opting for the old regime must maintain documents to support their deductions.
"Those who make such claims are more prone to scrutiny compared to those who opt for the new regime.
"Hence, if the amount of tax saving by opting for the old regime is not substantial, many taxpayers still opt for the new regime to avoid the administrative hassle attached to the old regime," says Sharma.
Mistakes to avoid
Taxpayers often overestimate their deductions.
"Many also neglect to reassess their choice of tax regime after significant life events, such as job changes, rental adjustments, or changes in insurance premiums," says Shah.
"This lack of periodic review frequently leads to suboptimal tax planning and higher tax liabilities due to the selection of an inappropriate tax regime," adds Shah.
Some individuals opt for the new regime without a comparative analysis of the tax liability under the two regimes.
"They choose the new tax regime for its simplicity, assuming it will automatically result in lower taxes," says Suresh Surana, a Mumbai-based chartered accountant.
"However, without evaluating the total value of the deductions and exemptions they are eligible for, they may overlook the possible tax savings under the old regime," adds Surana.
Many taxpayers fail to align their investments with their chosen regime.
"If you have declared that you will opt for the old regime, then you must invest in Section 80C and other eligible instruments," says Surana.
"If you do not, there may be a shortfall in the eligible deductions, leading to higher tax liability at the end of the year," adds Surana.
Overlooking mid-year changes in salary or financial obligations is another common mistake.
"Employees can declare their preferred regime with the employer for tax deduction at source (TDS) purposes," says Surana.
"But they have the option to switch regimes at the time of filing their return," Surana adds, "Not exercising this flexibility due to a lack of awareness is a lost opportunity for tax optimisation."
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Feature Presentation: Ashish Narsale/Rediff.com
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