The Government of India has introduced significant changes to the tax system starting from October 2024, which are set to impact salaried individuals. These updates include modifications in tax deduction rules, Tax Deducted at Source (TDS) rates, and related forms such as Form 12BAA. This comprehensive guide will help salaried persons understand the new rules, their implications, and how to navigate the changes effectively.
1. Updated Income Tax Regime for Salaried Individuals (FY 2024-25)
Starting from FY 2024-25, the income tax regime has undergone some notable changes aimed at providing better tax relief and simplification for taxpayers. Here are the key highlights:
Revised Tax Slab and Rebates: Under the new tax regime, individuals earning up to ₹7 lakh annually will not be required to pay any income tax. This is due to a rebate under section 87A, which effectively makes incomes up to ₹7 lakh tax-free.
Increased Standard Deduction: The standard deduction for salaried individuals has been increased to ₹75,000. Previously, the standard deduction was ₹50,000, and this increase aims to bring more relief to salaried taxpayers by reducing their taxable income.
Annual Switching Between Regimes: Salaried individuals can switch between the old and new tax regimes every financial year. The new regime is now the default option, but if individuals prefer the old regime, they can opt for it by submitting Form 10-IEA when filing returns.
The new tax regime is designed to be simpler, with reduced tax rates but fewer deductions compared to the old regime. It eliminates the need for many traditional tax-saving investments, making tax planning straightforward.
Example: If you are a salaried individual earning ₹7.5 lakh annually, you can avail the standard deduction of ₹75,000, which will bring your taxable income down to ₹6.75 lakh. With the rebate under section 87A, your tax liability will effectively be zero.
2. Key Deductions Available Under the New Tax Regime
Although the new tax regime has fewer deductions, several important benefits are still available to salaried persons:
Standard Deduction: Salaried individuals are eligible for a standard deduction of ₹75,000 from FY 2024-25 onwards.
Home Loan Interest Deduction (Section 24b): Interest paid on home loans for let-out properties continues to be deductible.
Employer Contributions to NPS: Employers’ contributions to the National Pension Scheme (NPS), up to 14% of salary, are eligible for tax deduction.
Leave Encashment Exemption: The exemption limit for leave encashment at the time of retirement has been significantly increased from ₹3 lakh to ₹25 lakh for non-government employees.
Gratuity and VRS Exemptions: Gratuity payments and amounts received under a Voluntary Retirement Scheme (VRS) remain tax-exempt under specific conditions.
Gifts: Gifts received up to ₹50,000 are exempt from tax.
Example: If you are retiring with accumulated leave, you can now receive up to ₹25 lakh as leave encashment, tax-free. This is a substantial increase from the earlier limit of ₹3 lakh, providing a significant financial benefit at retirement.
These deductions and exemptions make the new regime appealing, especially to those who prefer a simplified tax process without the need to invest in specific instruments to save on taxes.
3. TDS Changes and Introduction of Form 12BAA
Starting from October 2024, changes in TDS rates and forms will affect salaried individuals. Here are the key points to note:
- TDS Rates for Various Payments: Effective from October 2024, there have been adjustments in TDS rates for several types of payments.
- For professional services and director fees, the TDS rate remains 10%.
- Section 194M: TDS on payments made by individuals or Hindu Undivided Families (HUF) for contracts, commissions, etc., has been reduced from 5% to 2% for payments exceeding ₹50 lakh.
- For e-commerce transactions, the TDS rate has been reduced from 1% to 0.1% for payments above ₹5 lakh.
- Introduction of Form 12BAA: Form 12BAA is a new declaration form that salaried individuals need to submit to declare tax deductions and benefits applicable under TDS rules. This form provides a detailed breakdown of salary components and other perquisites received from the employer, ensuring accurate tax deductions at the source.
Tip: Ensure that you fill out Form 12BAA accurately to reflect all your deductions and perquisites, as this will directly impact the TDS calculated by your employer and help avoid discrepancies.
4. Switching Between Old and New Tax Regimes
One of the critical updates is the flexibility given to salaried individuals to switch between the old and new tax regimes. Starting from FY 2023-24, the new tax regime will be treated as the default regime. However, individuals still have the option to switch to the old regime if they believe it offers them better tax benefits. To do so, they need to submit Form 10-IEA when filing their income tax returns.
The ability to switch between regimes annually provides taxpayers with the opportunity to optimize their tax liability based on their financial situation each year. Those with substantial investments in tax-saving instruments might find the old regime more beneficial, while those who prefer simplicity might opt for the new regime.
Example: If you have significant investments in ELSS, PPF, and other 80C instruments, the old regime may offer you better tax savings. However, if you do not have such investments, the new regime with a higher standard deduction might be more advantageous.
5. Key Considerations for Salaried Individuals
Simplified Compliance: The new tax regime is designed to reduce the compliance burden for individuals. Without the need for complex tax-saving investments and proof submissions, taxpayers can save time and effort.
Increased Deductions: The higher standard deduction of ₹75,000 provides immediate relief, and leave encashment exemption up to ₹25 lakh offers significant benefits at retirement.
Ensuring TDS Compliance: With the changes in TDS rates, it is essential for salaried individuals to keep track of their TDS deductions through Form 26AS and ensure that the deductions are accurate. Proper submission of Form 12BAA will also help avoid discrepancies and ensure correct tax deduction.
Checklist:
- Verify your TDS deductions in Form 26AS.
- Submit Form 12BAA to your employer for accurate tax calculation.
- Decide on the appropriate tax regime based on your financial situation.
- Consider consulting a tax advisor if you are unsure about switching regimes.
Conclusion
The tax rule changes from October 2024 bring a mix of benefits and responsibilities for salaried individuals. With increased deductions, a higher rebate threshold, and the introduction of Form 12BAA, the government aims to simplify the tax process while ensuring efficient tax collection. The new tax regime, being the default, presents a streamlined option for taxpayers who want to avoid the complexities of traditional tax-saving investments, while the old regime remains available for those who wish to utilize existing deductions to minimize their tax burden.
As these changes take effect, salaried persons must stay informed and proactive. Whether opting for the old or new tax regime, it is crucial to understand the available benefits, comply with TDS rules, and plan effectively to minimize tax liability. If you need further clarification on how these changes impact you, feel free to reach out or consult a tax professional.
Action Point: Review your salary structure, deductions, and available exemptions to determine the most beneficial tax regime for you. Staying informed will ensure you make the best financial decisions and optimize your tax savings.
Thanks!