Switching between the old and new tax regimes is quite an important decision, especially with changes that were introduced by the budget for 2024-2025. The Indian government has provided taxpayers with the flexibility to choose between these two regimes based on their financial goals and income structures. Both of these tax regimes have their own innate benefits and limitations. While the old regime allows an array of exemptions and deductions, the new regime is more focused on lower tax rates with fewer exemptions. Learning how to switch between old and new tax regime is integral if you want to maximise your saving from taxes while remaining compliant to the legal rules and regulations.
Understanding the regimes
The old tax regime is ideal for people having substantial investments and high expenses since it allows deductions and exemptions under various sections like Section 80C, 80D, and HRA. At the same time, the new regime has lower tax rates but excludes most of the deductions, making it more suitable for those who value simplicity and have less complex income sources. The new regime is especially useful for people who earn less or have very small investments, in which case detailed tax planning is not required. Knowing about the benefits and limitations of both regimes, including their impact on your taxable income and long-term financial goals can help you decide which one best suits your financial situation.
Who can switch?
The ability to switch between the old and new tax regimes is available to both salaried individuals and those with income from business or profession, but the rules and flexibility differ significantly between these groups.
Salaried individuals have the advantage of being able to choose their preferred tax regime each financial year. This annual flexibility allows them to reassess their financial situation, deductions, and exemptions regularly, enabling them to optimise their tax savings based on changes in income or financial goals.
On the other hand, individuals with income from business or profession face a more restrictive process. They can switch between regimes only once in their lifetime while they continue to have business income. If they choose to revert to the old regime after opting for the new one, they are locked into the new regime for all subsequent years unless they cease to have business income. This one-time switch requires careful consideration, as it has long-term implications for your tax planning and overall financial strategy.
Can we change tax regime while filing ITR?
In the Union Budget 2023, the new tax regime was declared the default option. This means that if you do not actively choose between the old and new regimes, your tax will be computed under the new system by default. However, you still have the option to switch to the old regime while filing your Income Tax Return, provided it’s done before the due date (typically 31st July) of the relevant assessment year. The ability to switch between regimes may vary depending on your income source—salaried individuals can switch annually, while business professionals face restrictions.
Salaried individuals - flexibility with annual switching
Salaried individuals in India now have the flexibility to choose between the old and new tax regimes every financial year, thanks to the updates introduced in the Union Budget 2024-25. This annual choice allows you to review your financial situation each year and decide which tax regime is more beneficial for your needs.
The old regime is the best for people availing of several deductions and exemptions, including those under Section 80C up to Rs. 1.5 lakh, 80D, and HRA. With these deductions, it may substantially reduce your taxable income, making this regime very good for those who have huge investments either in savings schemes, insurance, or home loans. However, if your income structure has fewer deductions, the new tax regime will be more suitable. Under this regime, different income brackets have lower rates of tax but most deductions and exemptions are removed. For example, in the new regime, income up to Rs. 3 lakh is absolutely tax-free and under section 87A rebate is given on incomes up to Rs. 7 lakh, making such income effectively tax-free as well.
Given the options, it is very important to reassess your income, investments, and likely tax liabilities under the two regimes annually. This freedom to choose every year offers great chances for saving more of your hard-earned money from taxation, as your financial condition evolves, because you continue to remain in the regime most suitable for your ever-changing needs.
Individuals with business/profession income - one-time choice
For individuals earning income from business or profession, the choice between the old and new tax regimes is significantly restricted as compared to salaried individuals. They are permitted to switch between these regimes only once during their lifetime. This rule means that once they make a decision, they must adhere to it permanently unless they cease their business activities.
This one-time choice carries substantial implications. While the old regime is full of deductions and exemptions which help reduce taxable income, thereby bringing down tax liability, under the new regime, the rates of taxation would be lower, but most deductions and exemptions would be discontinued. So, it has to be a choice based on the impact of either regime on total tax outgo and financial goals.
Given the irreversible nature of this choice, business owners and professionals should seek guidance from tax advisors. Advisors can provide a detailed analysis of how the tax regimes interact with their specific financial situation, including current income, potential deductions, and long-term financial plans. Thorough planning and professional advice are essential to ensure that the selected tax regime optimally aligns with both immediate and future financial needs, maximising tax efficiency and minimising liabilities over time.
Crucial considerations before switching regimes
Before making the switch between the old and new tax regimes, it is crucial to conduct a thorough evaluation of several key deterministic factors. While the old tax regime allowed several deductions and exemptions that can cut down your taxable income by a large extent, the new regime remains somewhat laid back on these factors. Look at the kind of deductions that can be availed by you in the old regime, including those for investments, insurance premiums, interest on loans, etc.
Consider the impact on your long-term financial goals of each regime and where they really line up best. Yes, the new regime brings down rates, but it also eliminates a lot of deductions that may continue to play a big role in keeping down how much you owe as income tax, depending on your finances. Be aware of the administrative requirements involved in making the switch. For example, filing Form 10IE with the Income Tax Department is necessary so as to formally notify them of your choice.
Switching tax regimes is a major decision that includes tax implications and may have an effect on your overall financial plan. It has to be a delicate balance between these factors, and professional advice should be necessary in ensuring that the choice one makes fulfills immediate and futuristic financial goals.
What if you have forgotten to select which regime you want?
If you forget to select a tax regime at the beginning of the financial year, the new tax regime will be automatically applied to salaried individuals. Employers are mandated to deduct taxes based on this regime if no choice is made. This default applicability has been introduced to make the tax processing easier, though it may not be beneficial for everyone.
However, all is not lost if you have missed this selection. You can rectify this during the filing of your ITR for the financial year. During the ITR filing process, you can choose the tax regime that you believe will be more beneficial for your financial situation. This flexibility allows you to assess your income, deductions, and overall tax liability to select the regime that best aligns with your financial profile.
When making this choice, it is important to carefully evaluate the tax implications of each regime. The old regime provides a plethora of deductions and exemptions which may help reduce your taxable income. On the other hand, the new regime offers relatively lower tax rates but generally eliminates these benefits. By selecting the appropriate regime during your ITR filing, you can optimise your tax liability and potentially recover any overpaid taxes.
Forgetting to choose a tax regime initially does not mean you have missed your chance. You can still rectify the situation by making the right choice during your ITR filing, thus ensuring that your tax planning aligns with your financial goals.
How to switch?
If you want to know how to switch between old and new tax regime, it is fundamental to consider both their benefits and constraints. Moreover, this switch from the old regime to the new regime requires careful planning and timely action. Salaried individuals can make this switch by informing their employer of their choice at the start of the financial year. It will help the employer make proper tax deductions in that particular year. For those having business income, this would entail filing of Form 10IE with the Income Tax Department before the last date for filing the income tax return. When deciding which regime to choose, consider your income, available deductions, and exemptions. The old tax regime offers various deductions that can lower your taxable income, while the new regime provides lower tax rates but eliminates most deductions. Ensure that all relevant forms and documents are accurately completed and submitted to avoid complications and optimise your tax benefits.
How to opt out of the new regime
Individuals, HUFs, and AOPs must submit Form 10-IEA to opt out of the new tax regime.
Form 10-IEA acts as a formal declaration to switch back to the old regime.
Required for taxpayers filing ITR-3, ITR-4, or ITR-5 with business or professional income.
Not required for taxpayers filing ITR-1 or ITR-2 without business or professional income.
In such cases, they can opt out of the new regime directly within the ITR form.
How often can I switch between the two regimes?
I. For Taxpayers with Business Income:
Restricted Switching: Those with business or professional income cannot change tax regimes every year.
One-time Opt-Out Rule: Once they opt out of the new regime, they get only one chance to switch back to it.
No Second Reversal: After returning to the new regime, they cannot go back to the old regime again.
II. For Taxpayers with Non-Business Income:
Yearly Flexibility: Salaried individuals and others without business income can freely switch between the new and old tax regimes every financial year—offering greater adaptability to suit annual tax planning.
Opted out of the new regime last year, do I still need to switch to the old regime this year?
If you opted out of the new tax regime last year, it will not be applicable for the current year. The new tax regime is set as the default, so a fresh selection is required.
Here’s what you need to do:
To continue with the old tax regime, you must:
Submit Form 10-IEA if you have business or professional income, or
Tick the option to opt out of the new regime directly in the ITR form if you do not have business income.
Each financial year requires a new selection; the previous year's regime choice does not automatically apply.
Steps to File Form 10-IEA
Step 1: Sign In
Go to the Income Tax e-filing portal. Log in using your PAN and password.
Step 2: Access Tax Forms
From the dashboard, navigate to: e-File > Income Tax Forms > File Income Tax Forms.
Step 3: Locate Form 10-IEA
Search for Form 10-IEA using the search box or scroll through the form list. Click on ‘File Now’.
Step 4: Choose Assessment Year
Select the correct AY. For example, income earned in FY 2023–24 corresponds to AY 2024–25.
Step 5: Begin the Filing Process
Click on ‘Let’s Get Started’ after checking the required document list.
Step 6: Declare Business Income
Mention if you have income under “Profits and Gains from Business or Profession.” Choose the due date for filing and continue.
Step 7: Confirm Regime Change
Confirm you want to move to the old tax regime by selecting ‘Yes’.
Step 8: Form Sections to Fill
- Basic Information
- Your PAN and name are auto-filled.
- Based on previous year’s filing, the portal may pre-select your regime switch.
- Save and continue.
- Additional Information
- Enter IFSC-related details if applicable.
- This section stays inactive if you are just opting out of the new regime.
- Save and move to the next step.
- Declaration & Verification
- Agree to the declaration terms.
- Click ‘Preview’ to verify all form entries before submission.
Step 9: E-Verification
Verify using one of these methods:
Aadhaar OTP
Digital Signature Certificate (DSC)
Electronic Verification Code (EVC)
Step 10: Submit the Form
Once verified, confirm and submit the form.
Step 11: Get Acknowledgment
You’ll see a confirmation message with your Transaction ID and Acknowledgement Number. Save these details for records.
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When to submit form 10IE?
Form 10IE has to be filed by all individuals opting for the new tax regime, mainly those earning business or professional income. For salaried classes, Form 10IE is not applicable unless they have business income. The last date for submitting Form 10IE is on or before the due date for filing the income tax return of the concerned financial year. Timely submission of this form is crucial as it indicates your choice of tax regime to the Income Tax Department and ensures compliance with tax regulations. Moreover, after the latest changes introduced by the budget in 2024, it is paramount to know about the form 10IE prior to filing an income tax return and maximise savings.
What if I forget to file form 10IE?
If you forget to file Form 10IE within the given deadline, it may lead to some unforeseen complications. This is particularly key for if you are a business-owner or professional. If the form is not submitted by the due date, the taxpayer may be required to continue with the old tax regime for that financial year. This oversight can result in higher tax liabilities if the new regime was more beneficial. It is important to be proactive and ensure that all necessary forms are submitted on time. If you realise the mistake after the deadline, consult with a tax advisor to explore possible rectifications.
Things to consider while switching between tax regimes
When planning to switch your tax regime, it's essential to evaluate several factors to ensure you make a financially sound and compliant choice. Below are some important aspects to consider:
Know the Tax Regime Rules
Gain a clear understanding of both the old and new tax regimes, including how they differ in terms of slab rates, exemptions, and deductions.Compare Tax Outflows
Assess your estimated tax liability under each regime based on your income, eligible deductions, and exemptions. This helps you identify which regime offers better tax benefits in your situation.Evaluate Investment Impact
Switching regimes may affect your existing tax-saving investments. Some deductions (like Section 80C, 80D) are not allowed in the new regime. Consider how this shift influences your current and planned investments.Plan for the Long Term
Think about how your tax strategy fits into your broader financial goals, including future income changes, life events (like marriage, buying a home), and retirement planning.Maintain Proper Documentation
Ensure all relevant documents—proof of income, investment details, and deduction claims—are in order and easily accessible in case of verification or audit.
Conclusion
The process of how to switch between the old and new tax regime requires an in-depth evaluation of your financial situation, potential deductions, and long-term objectives. While salaried individuals have the advantage of making annual adjustments, those with business income must choose more permanently. Adhering to deadlines and accurately filing necessary forms is essential for a seamless transition. For personalised guidance, consulting with a tax advisor can provide valuable insights and help navigate the complexities of tax planning.
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