The Indian government has recently introduced offers taxpayers the option of choosing between the existing tax regime and the new tax regime. However, before switching to the new tax regime, taxpayers should consider the pros and cons of the new tax regime.
Before switching to the new tax regime, taxpayers should evaluate the impact of the new tax regime on their tax liability. They should compare their tax liability under the existing tax regime and the new tax regime and choose the one that offers them the best tax benefit. Taxpayers should also consider their income sources, deductions, and exemptions before choosing between the two tax regimes.
Taxpayers who have already made investments in these instruments should evaluate the impact of the new tax regime on their investments. They should also consider the long-term benefits of these investments before switching to the new tax regime.
Before switching to the new tax regime, taxpayers should 4 key considerations before switching to new tax regime-
1. Home Loan Interest Deduction for Rented Property Owners
Under the new tax regime, individuals can only claim a deduction for interest paid on their housing loan if the property for which the loan was taken is rented out. It’s important to note that this deduction is limited to the amount of rent received. If the rent charged is lower than the interest amount, any resulting loss cannot be offset with any gains or carried forward. As a result, taxpayers should factor in their home loan interest costs and assess whether the new tax regime is the best option for them. This cost may vary depending on the type of home loan taken.
2. Annual Regime Switch for Non-Salaried Individuals
If your only source of income is your salary, you have the option to switch between tax regimes every year. However, those who have income from a business may not always be able to make the switch. It’s important to note that it’s recommended to compare the different tax regimes before making the switch. For those with business income, it may be difficult to switch back to the previous regime once they drop out.
3. Ensure Switch to New Regime for 2022-23: File ITR by 31 July
If an individual intends to transition to the new tax regime for the financial year 2022-23, it is obligatory to file the original income tax return by July 31, 2023. It is prudent to exercise caution and be mindful of the tax regimes while filing the initial ITR. If a taxpayer submits an original ITR under the old tax regime but subsequently files a revised ITR under the new tax regime, the tax department may disallow such claims. Starting from the year 2023-24, the new tax regime will become the default regime.
4. Certain losses are non-adjustable and cannot be carried over
To reduce tax liabilities arising from short-term capital gains, taxpayers often turn to loss harvesting. This involves booking losses on existing investments in order to offset gains made on other investments, thereby lowering the overall tax payment. Once the losses have been booked, the investments are bought back at market price to maintain the desired asset allocation plan. However, under the new tax regime, this strategy cannot be applied to certain assets.
The new tax regime imposes restrictions on carrying forward and setting off certain losses. As a result, for those with carry forward losses from the previous year, it may be more beneficial to opt for the old tax regime instead of the new one. One such restriction under the new tax regime pertains to income from house property, which cannot be set off with any other heads of income, nor with any loss or depreciation from any earlier assessment year.
In summary, loss harvesting remains a popular tax planning strategy, but its applicability is limited under the new tax regime. Taxpayers should be aware of these restrictions and carefully consider their options when planning their tax liabilities.
