Switching tax regimes while filing ITR: What you need to know

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Since April 2020, Indian taxpayers have two options: the old regime with higher tax slabs but exemptions and deductions like HRA, LTA, and Section 80C, and the new regime with lower rates but no major deductions. It is extremely important to choose the right regime while saving taxes because it depends on your income mix, available exemptions, and overall tax incidence.

Can salaried employees make a switch?

Yes, there is the flexibility with salaried taxpayers. They can choose the old and new regime every year at the time of filing their Income Tax Return (ITR). Even though they may have shown one regime to the employer for the purpose of TDS, while filing they can switch to the other regime. This annual flexibility allows salaried taxpayers to calculate which mode is better and switch accordingly.

What about business and profession income?

For taxpayers having income from profession or business, the provisions are stricter. They can switch regimes only once in a lifetime. Having availed the option of emerging out of the old regime and opting for the new one, they cannot switch back to the old regime in subsequent years. This restriction is brought in to achieve uniformity and prevent frequent switching on the part of self-employed.

Choosing the regime wisely

Taxpayers must calculate their tax liability under both systems before submitting. Persons with massive deductions under Section 80C (like PF, PPF, ELSS, or insurance premium) or exemptions of the nature of HRA and LTA will be better served under the previous regime. Others with no heavy deductions or with vanilla plain income will find the new scheme preferable based on lower rates.

Implications of the decision

The regime you choose affects not just your present tax burden but also long-term planning. Salaried taxpayers can modify the choice every year, but self-employed filers need to plan long term before making a change. If the ITR is submitted after the due date, the selected regime is applicable for the respective financial year, and modifications cannot be made thereafter. Proper planning is essential to take the maximum benefit and prevent future regrets.

FAQs

Q: Will I be able to change my tax regime after filing my ITR?

No. Once you file your return, the choice is permanent for that financial year. You can only change it in the next year while filing once more.

Q: Even if I notified my employer that I am going under the old regime, can I still opt for the new regime while filing ITR?

Yes, salaried taxpayers can switch their option at the time of filing their ITR, regardless of what they reported to the employer earlier.

Q: Do I need to file a special form to select the new tax regime?

Only taxpayers having income from business or profession are required to file Form 10-IEA to opt or continue under the new regime. Salaried taxpayers can switch immediately while filing their ITR.