Old vs. New Tax Regime: Most people believe that if an individual’s annual income is below ₹2.5 lakh, they are not required to file an income tax return. Under ordinary circumstances, this holds true because, in the old tax regime, income up to ₹2.5 lakh falls within the basic exemption limit. However, the income tax laws contain specific provisions that may mandate filing a return even if one’s income is below this threshold.

Therefore, assuming that a return is unnecessary solely because of income limits is not always correct; if an individual has engaged in certain types of financial transactions, they may be required to file an income tax return within the stipulated timeframe.

When is filing an ITR mandatory even with a low income?

Even if your total income is below the basic exemption limit, you may be required to file an income tax return under income tax rules if you have undertaken certain specific financial transactions during the financial year. For instance, if you have spent ₹2 lakh or more on foreign travel or conducted a high-value transaction through your bank account, you must disclose this while filing your return.

In such cases, a reporting obligation arises regardless of the amount of income. The primary objective is to ensure transparency in significant financial transactions and that the Income Tax Department maintains accurate records.

What is the Old Tax Regime?

For context, the old tax system has been in place for a long time and offers various tax exemptions and deductions. Under this system, the basic tax exemption limit is set at ₹2.5 lakh. If an individual’s taxable income is up to ₹5 lakh, their effective tax liability can be reduced to zero due to the tax rebate available under Section 87A of the Income Tax Act.

Consequently, the old tax regime is most beneficial when individuals invest in various schemes and fully utilise available deductions to save on taxes. Under this regime, employees, salaried individuals, business owners, and taxpayers can avail themselves of tax relief through provisions such as Sections 80C and 80D, as well as deductions for home loan interest, education loans, NPS contributions, and various other categories.

The New Tax Regime

The objective of the new tax regime is to simplify the taxation system. It features lower tax rates and more convenient income slabs. While most traditional tax exemptions and deductions are unavailable under this new system, taxpayers benefit from lower tax slabs and a simplified process.

The basic exemption limit is higher in this regime, and eligible taxpayers can receive tax relief up to a specified limit under Section 87A. Specifically, salaried taxpayers who meet certain conditions can effectively enjoy zero tax liability up to a higher income level. The new regime is considered more convenient for individuals who do not make tax-saving investments or have access to significant deductions.

Difference Between the Old and New Tax Regimes

The old tax regime offers taxpayers various tax deductions and exemptions. While it provides greater opportunities to save tax through investments, the tax calculation process can be relatively complex.
Conversely, the new tax regime has eliminated most exemptions but offers more attractive tax slabs. This results in less paperwork for the taxpayer and simplifies the tax filing process. Therefore, determining which regime is better depends entirely on the taxpayer’s income, investments, expenses, and tax-saving strategy.

Benefits of Section 80C

A key feature of the old tax regime is Section 80C of the Income Tax Act. Under this section, taxpayers can claim a tax deduction on income up to ₹1.5 lakh by investing in various savings schemes. Section 80C covers investment schemes such as the Public Provident Fund (PPF), Employees’ Provident Fund (EPF), life insurance premiums, Equity Linked Savings Schemes (ELSS), National Savings Certificates (NSC), Sukanya Samriddhi Yojana, tax-saving fixed deposits, and children’s tuition fees. If a taxpayer invests in these schemes, their taxable income decreases, potentially leading to significant tax savings.

Benefits of Section 80D

Under the old tax regime, Section 80D offers a tax deduction for health insurance premiums. Deductions are available up to specified limits for premiums paid for medical insurance covering oneself, a spouse, children, and parents. This provision not only aids in tax savings but also encourages health coverage.

Penalty for Not Filing ITR on Time

If your income is below the basic tax exemption limit and filing an income tax return is not mandatory for you under the law, no penalty is imposed for not filing an ITR. However, if you fall into a category where filing an ITR is mandatory but fail to do so within the stipulated deadline, the Income Tax Department may levy a penalty involving late fees, interest, and other applicable charges. Filing an ITR on time also facilitates various future processes, such as obtaining loans, applying for visas, and preparing financial documents or proof of income.

Which tax regime should you choose?

If you make substantial annual investments in instruments like PPF, LIC, ELSS, NPS, health insurance, home loans, and other tax-saving schemes, the old tax regime may prove more beneficial for you. Conversely, if your investments are minimal, you do not avail yourself of tax-saving deductions, and you prefer a simpler tax structure, the new tax regime could be a better option. However, since every taxpayer’s financial situation is unique, the choice of tax regime should be made only after comparing your income, investments, expenses, available deductions, and potential tax liability.

Conclusion

It is important to note that having a low income does not necessarily mean you are exempt from filing an income tax return. If you have undertaken certain significant transactions during the financial year, filing an ITR may be mandatory even if your income is low. While the old tax regime offers extensive benefits through investment-linked tax exemptions, the new tax regime has emerged as an attractive option for many taxpayers due to its simplified process and lower tax slabs.