Switching tax regimes: What salaried individuals need to know during ITR filing

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Understanding the two tax regimes

The new tax regime of India offers taxpayers two choices: the old regime, in which they pay higher rates but avail a number of deductions and exemptions, and the new regime, in which they pay lesser rates but avail fewer exemptions. Salaried taxpayers must opt for one of the regimes at the time of filing returns, and it can significantly influence their effective tax incidence.

When salaried taxpayers are able to change regimes

In the case of salaried taxpayers, the facility to change regimes is provided at the time of submitting their Income Tax Return. Even though they may have declared their intention of opting for old or new regime with their employer for the year, they can rethink when they are submitting their final return. This facility gives salaried taxpayers an opportunity to calculate all their investments, deductions, and total income before making a final decision.

Employer declaration versus filing of ITR

The employers tend to ask the salaried people to declare their preferred regime at the start of the year so that TDS can be calculated accordingly. Nonetheless, this declaration is not binding for the purpose of filing of ITR. Near the end of the year, when the taxpayer computes effective deductions such as HRA, investment under Section 80C, or the advantage offered by a home loan, he may find that an alternative regime is advantageous. In that case, they can change over while filing their return.

Restrictions for business or professional taxpayers

It is noteworthy to quote that this flexibility is generally for salaried individuals. Taxpayers earning business or profession income are relatively restricted, since they can change their regime option only once in their lifetime, after which the option gets fixed. For salaried individuals, however, the law provides for it to be changed annually with every assessment year, which goes a long way in planning taxes.

How to change while filing

The form of Income Tax Return lays down a specific section in which the taxpayers can indicate their choice of regime. If a salaried individual wants to shift from the regime declared to the employer, one can go for the other alternative provided in the ITR form. The tax liability would be recalculated accordingly, and any surplus TDS deducted by the employer can be claimed as a refund. This makes it essential to make both the options comprehensively analysed before submission.

Why careful analysis of regime options is needed

The decision between the old and new regimes primarily depends on the investment portfolio and income structure of the investor. For people who rely heavily on deductions like Section 80C, 80D, or HRA, the older regime may still be more beneficial. But fewer exemptions will make it simpler and more rewarding to enjoy the new regime. Therefore, comparing tax expenditures under the two regimes before submitting is the best approach to paying less than one has to.

FAQs

Q. Can I change my tax regime every year as an employee?

Yes, the salaried assessees can switch between the old and new regimes of taxation every year while filing ITR. The option opted with the employer for TDS will not restrict the final option at filing time.

Q. What if my employer deducted TDS on some other regime?

It is okay if your TDS was calculated under a different regime but you file under another. Your liability will be re-calculated, and you will either need to pay the difference or claim credit for excess TDS.

Q. Do I have to inform my employer about the change while filing?

No, you don't need to intimate your employer. The employer's job is to deduct TDS on the basis of your first declaration. The final regime choice is made independently while filing your return with the Income Tax Department.