 "Explained: How to switch between old and new tax regimes (1)")
Illustration: AJAY MOHANTY
In India, navigating between the old and new tax regimes involves understanding your tax profile and filing the relevant forms during the income tax return (ITR) filing process. However, you can only switch regimes when filing your Income Tax Return (ITR) for a particular financial year. This happens typically between April and July of the following year.
Understanding the Regimes:
The old tax regime allows for a plethora of deductions and exemptions, potentially reducing your taxable income. However, it comes with higher tax rates. The new tax regime, introduced in 2020, boasts lower tax rates but offers fewer deductions. Analyzing your income sources and potential deductions is crucial for determining which regime best suits your financial situation.
Who Can Switch?
Individuals without income from business or profession have more flexibility. Since the new tax regime is now the default for them starting from Assessment Year 2023-24 (financial year 2022-23), they can simply opt for the old regime while filing their Income Tax Return (ITR). Most ITR forms like ITR-1 (SAHAJ) and ITR-4 (SUGAM) come with a built-in option for selecting the desired regime.
Form 10IE is a declaration made by the return filers for choosing the ‘New Tax Regime’. Individuals or HUFs with business or professional income must submit Form 10IE if they wish to pay income tax as per the new tax regime
Here's a detailed breakdown by Ritika Nayyar, Partner, Singhania & Co. for salaried individuals and those with business/profession income:
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Salaried Individuals - Flexibility with Annual Switching:
•The new tax regime is now the default setting for salaried taxpayers. This means unless you actively opt out, you'll be taxed under the new structure with its lower tax rates but no deductions for common expenses like house rent allowance (HRA), medical insurance, etc.
•If calculations show the old regime with its deductions proves more beneficial for your tax situation, you can switch annually. To make this switch, you'll need to file Form 10-IEA before the due date of filing your ITR (typically July 31st).
Example:
Suppose you're a salaried employee and during the 2023-24 financial year (assessment year 2024-25), you discover that the deductions offered under the old regime, such as HRA and medical insurance benefits, would significantly lower your tax outgo. To avail these benefits, you'll need to file Form 10-IEA by July 31st, 2024, while submitting your ITR. Remember, any tax-saving investments or expenditures you make should be aligned with the chosen regime to maximize their effectiveness.
Individuals with Business/Profession Income - One-Time Choice:
•Unlike salaried individuals, those with business or professional income, including income from derivatives or options trading, have a one-time option to choose between the regimes. You can either opt for the new regime at the outset (by filing Form 10IE earlier) or stick with the old regime with its traditional benefits and deductions.
•This choice is crucial because it's a one-way street. Once you select a regime, there's no provision to switch back and forth in subsequent years.
Crucial Considerations Before Switching Regimes:
•Impact on Tax-Saving Strategies: The tax regime you choose directly impacts the tax benefits you can claim. Carefully evaluate your tax-saving investment options (like Public Provident Fund [PPF] or National Pension Scheme [NPS]) and deductions (like interest on home loan) to ensure they align with the chosen regime. Make sure to plan your tax-saving moves well before the deadline to optimize your tax outgo.
What if you have forgetten to select which regime you want?
In the absence of an explicit selection between the old and new tax regimes, the taxpayer's taxes will be computed automatically in accordance with the new regime. "Salary-earning employees are granted the option to annually transition between the old and new tax regimes. If an individual notifies their employer of their intention to convert to the new tax regime via default, they may continue to utilize the old tax regime when preparing their income tax return. On the contrary, those who do not belong to these specific groups—such as those who derive their income from a profession or business—are not eligible to transition between the old and new regimes more than once in their lifespan," said Adithya Reddy, International Tax Lawyer.
For instance, when filing an income tax return, a taxpayer may utilize Section 115BAC of the Income-tax Act to designate the tax regime for each fiscal year (assuming no business income). The income tax return form offers the option for an individual to designate the tax regime in which their income should be computed for a specific fiscal year. Form 10-IEA must be submitted by such taxpayers in order to opt out of the new tax regime. Conversely, salaried individuals have the ability to utilize ITR forms (ITR-1 or ITR-2) to access the segment devoted to tax regime selection and select the option labeled "New tax regime.
How to switch?
"Switching can be done while filing the ITR ( a checkbox needs to be selected for a new regime or an old regime) and a declaration in form 10IE to select the regime. They will have you inform the department of their choice while submitting the form," said Alay Razvi, Partner, Accord Juris LLP.
When to submit Form 10IE?
Form 10IE has to be filed BEFORE filing your income tax return. "After submitting Form 10IE, a 15-digit acknowledgement number will be generated. Taxpayers cannot proceed with their ITR filing under the new tax regime without mentioning this 15-digit acknowledgement number," said ClearTax in a note.
What if I forget to file Form 10IE?
If the taxpayers forget to fill the Form 10IE before or at the time of filing of ITR, they will not be able to opt for the new tax regime. They cannot benefit from the concessional tax rates under the new regime. The income tax department will calculate tax based on the old tax regime.
