With new tax regime sweetened in Budget 2024, can you switch mid-year? Tax experts seek clarity

Salaried tax-payers might find it difficult to switch between regimes due to I-T dept's April 2020 circular

Salaried taxpayers, who had chosen the old income-tax (I-T) regime at the start of the financial year 2024-25 and wish to shift to the new tax regime now find themselves in a bind, even though Finance minister Nirmala Sitharaman has further sweetened the deal in her Budget speech on July 23.

Can they revise their proposed investment declarations - specifically, intimation regarding the choice of regime - submitted to employers now, to convey their intention to switch to the new tax regime this financial year?

Clarification from income tax dept needed

The tax tangle has its genesis in an older notification issued by the Central Board of Direct Taxes (CBDT) in April 2020, soon after the new tax regime was introduced in Budget 2020. “…the intimation so made to the deductor (employer)...cannot be modified during that year,” the CBDT circular stated.

Later, in April 2023, the CBDT issued another circular that superseded the 2020 notification. "Based on this revised CBDT Circular, the employees who wanted to opt for the old regime have given their declarations to their employers, starting from April 2024 itself. Employers have already deducted TDS from salaries for the first quarter, based on such declarations," said Mayank Mohanka, CA and Founder-Director, TaxAaraam.com, a tax consultancy firm.

Now, post budget, there is a possibility that such employees may want to revisit their choice of regime once again. "Thus, this revised CBDT circular needs a further addendum for enabling the employees to revise their declarations for choice of regime to accommodate these Budget changes," he said.

However, there are other tax experts who believe employers can extend the option to their employees even now. “There are no restrictions as per law; circulars are binding on the income tax department, not the assessees. Employers can allow their employees to revise their choice of regime during the financial year. However, if the employer, due to administration challenges, cannot do so, then employees can exercise their final choice at the time of filing returns and claim refund of excess tax deducted,” says Naveen Wadhwa, vice-president, Taxmann.

Chartered accountants Moneycontrol spoke to said they have sent requests in their individual capacities to the I-T department to facilitate the switch from old to new tax regime during this financial year. “This is a universal problem. At an individual level, CAs and corporate houses are making representations to the I-T department, and we hope that a clarification will be issued soon to facilitate revised investment declarations by employees,” said Mohanka.

Also read: Old vs new (simplified): Which income tax regime will help you save more on tax outgo?

Proposed declarations for TDS computation

At present, employers typically allow their employees to exercise their choice of tax regime while filing proposed investment declarations in April; the start of the financial year. On the basis of these declarations, employees' tax liability for the financial year is computed and deductions are made every month from their salary.

Salaried individuals are allowed to switch between the two tax regimes every year, even at the time of filing I-T returns, but the intimation regarding their selection — in the form of proposed investment declarations — needs to be communicated to the employer in April.

Revise rules or let employees wait until ITR filing

So, hypothetically, if an employee who had explicitly chosen the old regime finds that her tax outgo will be lower in the new regime, she will have to wait until June or July 2025 to file her return and claim refund for the excess tax deduction.

“There is merit in the requests to allow modifications as the government, after all, wants to incentivise the new tax regime,” Mohanka added.

With Budget 2024 revising income tax slabs, hiking standard deduction to Rs 75,000 and increasing the tax benefit on employers’ contribution to employees’ National Pension System (NPS) from 10 percent to 14 percent, some tax-payers are likely to favour the new regime. “There should be an option to make a switch now, as the laws have changed mid-year,” said Bhavesh Shah, Senior Partner with Mumbai-based chartered accountancy firm Hasmukh Shah & Co LLP.

Tax experts expect a clarification from CBDT in due course. "An enabling provision will have to be made so that employers can offer the option to modify investment declarations made by employees," said Mousami Nagarsenkar, Partner, Deloitte India.

Also read: Taxpayers note — new income-tax regime will be default tax regime from 2023-24

From financial year 2023-24 onwards, the new tax regime has been made the default framework. Consequently, the change in tax rates and rules in the middle of the financial year could primarily create hurdles for those wishing to switch from old to new regime. Those who had not informed their employers about their preference or had chosen the new regime in April are unlikely to face challenges.