TDS on salary: Do not pay higher taxes! Choose between new and old tax regimes wisely

Income tax: If you have ever viewed your pay slip as an employee, you may have noticed that there is a gap between your CTC and your in-hand salary. That is because employers deduct tax from your salary before paying it in your account and deposit it with the government on behalf of the employee. 

This deduction made by the employer is tax deducted at source or TDS. Section 192 of the Income-tax Act of 1961 deals with TDS on salaries. It requires all employers to calculate income tax on salaries that exceed the basic exemption limit and to deduct TDS on salary payments. 

So how can you pay less tax on your salary? 

As per CA Ruchika Bhagat, MD, Neeraj Bhagat & Co., choosing the right tax regime from the old tax regime and the new tax regime can help taxpayers save more tax.

Let's first take a look at both regimes.

New Tax regime 

As of FY 2023-24, the new income tax regime is set as the default option. If one wishes to continue using the old regime, they must submit the income tax return along with Form 10IEA before the due date. There is also an annual option to switch between the two regimes to assess tax benefits.

In the 2023 budget, the government implemented five significant changes, which persist into FY 2024-2025, as no alterations were made in the interim budget of 2024. These changes included:

>>Introduction of full tax rebate on incomes up to Rs 7 lakh, compared to Rs 5 lakh under the old tax regime. 

>> Elevation of tax exemption limit to Rs 3 lakh, accompanied by revised tax slabs.

>> Extension of standard deduction of Rs 50,000, previously exclusive to the old regime, to the new tax regime as well. Together with the rebate, which results in Rs 7.5 lakh as tax-free income under the new regime.

>> Deduction in family pension claim of Rs 15,000 or 1/3rd of the pension, whichever is lower.

>> Reduction in the surcharge rate on income over Rs 5 crore from 37 per cent to 25 per cent, leading to a reduction in the effective tax rate from 42.74 per cent to 39 per cent.

>>Increase in the exemption limit for non-government employees from Rs 3 lakh to Rs 25 lakh, marking an eight-fold increase.

Old tax regime 

Within this framework, taxpayers have access to over 70 exemptions and deductions, encompassing benefits such as HRA and LTA, aimed at diminishing taxable income and consequently reducing tax liabilities. Among these, Section 80C stands out as one of the most favored and substantial deductions, permitting a reduction of taxable income up to Rs.2.5 lakh.

Taxpayers are afforded the flexibility to choose between adhering to the old tax regime or transitioning to the new one, depending on their financial circumstances and preferences.

New and Old Tax slabs and rates 

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