Old Tax Regime vs New Ta Regime: Taxpayers often find themselves in a quandary when it comes to selecting the most suitable income tax regime. The Income Tax Department allows individuals to choose their preferred income tax regime for a particular financial year, with the frequency of switches permitted based on one’s profession or specific criteria outlined in tax regulations.
Currently, two tax regimes are available: the Old Tax Regime and the New Tax Regime. Following the Union Budget 2023, the New Tax Regime serves as the default option. Taxpayers must indicate their chosen tax regime while submitting their proofs and when filing their tax return.
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Switching tax regimes
If you have invested in tax-saving instruments but realise that you are unable to claim deductions for them due to not informing your employer about opting for the old tax regime, there is a solution.
Switching between the Old Regime and the New Regime is possible for individuals, allowing their annual tax regime to alternate between the previous and new regimes if certain conditions are met. The number of switches allowed is determined by your occupation or specific criteria outlined in tax regulations. It means if you are a salaried taxpayer you can do it every financial year, whereas a self-employed can change it only once in lifetime.
How many times can you change your tax regime?
Section 115BAC of the Income-tax Act, 1961, pertains to the New Tax Regime, which allows individuals to select their preferred tax regime each financial year, provided they do not have business income. When filing their income tax return, individuals have the option to choose the tax regime under which they want their income assessed for that particular financial year.
Salaried individuals and business professionals can decide between the old and new tax regimes annually. On the other hand, individuals who do not fall into these categories are limited to switching between the old and new regimes only once in their lifetime.
Salaried individuals have the flexibility to switch between the new and old tax regimes every year, enabling them to align their tax strategy with their financial situation.
Taxpayers who have opted for the new TDS regime for the entire year can effortlessly switch their preferred tax regime when they file their Income Tax Return (ITR). The Central Board of Direct Taxes (CBDT) has made modifications to the income tax return forms for the Assessment Year 2024-25. In ITR Form 1, taxpayers are given the choice to pick their preferred tax regime, granting them greater authority over their tax obligations.
Opting out of New Tax Regime
Individuals who wish to “opt out” of the New Tax Regime for the financial year 2024-25 must complete a separate form along with selecting the ‘Old Regime’ option on their tax return forms. Failing to do so may result in the tax computation being processed under the new regime, possibly resulting in unintended tax consequences. It is important for taxpayers to carefully follow these instructions to ensure accurate tax calculation.
Form 10-IE
Individuals earning income from a business or profession are allowed to change tax regimes only once. If a self-employed taxpayer chooses to switch to the new tax regime, they may revert back to the old regime only once in their lifetime.
To make the transition between tax regimes, these taxpayers must submit Form 10-IE along with their Income Tax Return (ITR). Failure to submit Form 10-IE by the original ITR filing deadline will prevent them from switching back to the old regime for that particular year.
Before filing the income tax return, Form 10-IE must be submitted. Upon submission, a 15-digit acknowledgment number will be provided. It is crucial for taxpayers to include this acknowledgment number when filing their ITR under the new tax regime.
Choosing the right tax regime
Choosing the appropriate tax regime is a critical decision that necessitates a thorough assessment of your financial circumstances and objectives. The break-even point, at which the two regimes offer comparable advantages, varies depending on income levels.
The old regime offers several deductions and exemptions under categories like 80C, House Rent Allowance (HRA), and Leave Travel Allowance (LTA), which can be advantageous for individuals with eligible expenses. If you have significant investments in tax-saving instruments, the traditional regime may prove more advantageous.
Conversely, the new regime offers a simpler tax structure but requires meticulous financial planning, as tax-saving investments may not yield as favorable results.