The Indian tax landscape presents taxpayers with a choice between the old and new tax regimes. While the new tax regime offers simplified calculations and lower headline rates, opting for the old tax regime might increase the probability of facing scrutiny from the tax department, according to Preeti Sharma, Partner, Global Employer Services, Tax & Regulatory Services at BDO India.
Several factors contribute to this potential increase in scrutiny. The old tax regime allows for a wide array of deductions and exemptions, including those under Section 80C for investments like EPF, PPF, and ELSS, HRA (House Rent Allowance), LTA (Leave Travel Allowance), and deductions for medical insurance premiums under Section 80D, and NPS contributions under section 80CCD. Claiming these deductions requires taxpayers to maintain thorough records and documentation to substantiate their claims. Any discrepancies or inconsistencies in these claims can trigger inquiries from the tax authorities.
Moreover, the Income Tax Department possesses sophisticated data analytics capabilities to identify potential discrepancies between income reported and deductions claimed. With the implementation of tools like the Annual Information Statement (AIS), the tax department can easily cross-reference taxpayer-declared information with third-party data related to financial transactions, investments, and other income sources. Sharma advises taxpayers to carefully download and review their Form 26AS and AIS to validate the information and ensure accuracy. Discrepancies between these forms and the tax return can lead to notices from the tax department.
Furthermore, the inherent complexity of the old tax regime, with its numerous deductions and exemptions, can lead to genuine errors in tax calculations and reporting. Taxpayers may misinterpret the provisions, leading to incorrect claims or underreporting of income. Such errors, even if unintentional, can attract the attention of the tax authorities and potentially trigger an inquiry. Individuals travelling for work outside India may also face challenges in correctly determining their Indian Residential Status and taxability, assuming that income from foreign employment is not taxable in India, which may lead to scrutiny.
It's also worth noting that the government has faced challenges in reducing tax disputes and litigation. Even though only a small percentage of returns are selected for further scrutiny, the complexities within the old tax regime contribute to this issue.
To mitigate the risk of inquiries under the old tax regime, taxpayers should maintain meticulous records of all income, investments, and expenses. They should also seek professional advice from tax experts to ensure accurate interpretation and application of tax laws. It is crucial to reconcile all relevant documents, including Form 16, Form 26AS, and AIS, before filing the income tax return. In case of any discrepancies in the AIS, taxpayers have the option to provide feedback and raise queries online.
While the new tax regime offers simplicity, individuals should carefully evaluate their specific financial circumstances and tax liabilities before making a choice. The old tax regime, despite its complexity, may still be beneficial for those who can maximize deductions and exemptions. However, taxpayers must be prepared to maintain accurate records and potentially face a higher probability of scrutiny from the tax department.
