Tax Regime

What Is the Tax Regime?

Tax regime refers to the system of tax rules and structures that govern how employees and employers handle income tax obligations. In Indian HR management, the tax regime determines salary structuring, deduction calculations, and take-home pay computations. Companies must navigate between old and new tax regimes to optimise employee compensation packages.

What Are the Key Components of a Tax Regime?

A tax regime encompasses various elements that HR must address:

• Tax Slabs: Progressive or flat rates applied to employee earnings.
• Deductions and Exemptions: Allowances like retirement contributions or medical expenses that reduce taxable income.
• Compliance Deadlines: Timelines for submitting tax filings and payments.
• Statutory Contributions: Mandatory payments like social security or provident funds.

How Do India’s Old and New Tax Regimes Differ?

Old Tax Regime

The Old Tax Regime allows numerous deductions and exemptions, reducing taxable income. Key provisions include:

Section 80C

Up to ₹1.5 lakh deduction for investments in PPF, ELSS, life insurance, etc.

Section 80D

Up to ₹25,000 for health insurance premiums (₹50,000 for senior citizens).

HRA Exemption

Under Section 10(13A), based on rent paid, salary, and city of residence.

Standard Deduction

₹50,000 for salaried individuals.

Tax slabs for FY 2024–25 (AY 2025–26)

• Up to ₹2.5 lakh: Nil
• ₹2.5–5 lakh: 5%
• ₹5–10 lakh: 20%
• Above ₹10 lakh: 30%

New Tax Regime

Default since FY 2024–25, the New Tax Regime offers lower tax rates but eliminates most deductions. Key features of it include:

Standard Deduction

₹75,000 for salaried individuals, raising the tax-free limit to ₹12.75 lakh.

Limited Deductions

Only Section 80CCD(2) (employer’s NPS contribution up to 14% of salary) and Section 80CCH (Agniveer Corpus Fund) allowed.

HRA and Other Exemptions

Not available, including Sections 80C, 80D, and 24(b) for self-occupied property.

Tax slabs for FY 2024–25 (AY 2025–26)

• Up to ₹4 lakh: Nil
• ₹4–8 lakh: 5%
• ₹8–12 lakh: 10%
• ₹12–16 lakh: 15%
• ₹16–20 lakh: 20%
• ₹20–24 lakh: 25%
• Above ₹24 lakh: 30%

What Are Employer Responsibilities Under Different Regimes?

Employers must accommodate employee choices regarding tax regime selection. They need to update payroll systems to handle both calculation methods and ensure accurate TDS deduction throughout the financial year.

Key responsibilities include:

• Collecting employee regime declarations at year beginning
• Processing salary restructuring requests based on regime choice
• Maintaining separate calculation worksheets for compliance
• Providing clear communication about regime implications

How Does Tax Regime Choice Affect Salary Structuring?

The choice of tax regime has a strong impact on how employers structure pay packages. Under the old tax system, companies can typically structure salary components like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and meal allowances to aid employees in reducing their taxable income through various exemptions and deductions.

The new regime compensates with lower taxes while scrapping most of these exemptions to have a simpler salary structure and limited tax planning opportunities.