Income Tax Regime Change Process FY 2024-25: At the beginning of a financial year, individuals are required to choose either the old or new tax regime to enable their employers to deduct taxes from their salary. However, there might be situations where someone wishes to switch from their initially chosen tax regime. The income tax laws do allow for this change to salaried employees, and here’s how it can be done.
Starting from April 1, 2023, if an individual taxpayer hasn’t selected the old tax regime, their employer will deduct tax on their salary (TDS) based on the new tax regime by default. This shift occurred as the new tax regime became the default option from the Financial Year 2023-24 onwards.
As of the interim budget in 2024, there have been no alterations to the income tax rules. Therefore, for the current financial year 2024-25, the new tax regime will continue to be the default option.
In an April 2023 circular, the Central Board of Direct Taxes (CBDT) did not address whether an employee can switch tax regimes during the financial year. This lack of clarification means it’s uncertain if an employee who initially chose the new tax regime in April 2023 can change to the old tax regime in January 2024.
Also Read: Income Tax Return Last Date 2024: ITR Filing Due Date – All details
Tax experts suggest that employees may be able to switch tax regimes during the financial year, depending on their company’s policy. However, some employers might not permit such changes (from new to old or vice versa) mid-year. If a salaried individual doesn’t specifically opt for the old tax regime, their employer will deduct taxes based on the income tax slabs applicable under the new tax regime.
When can an individual change the tax regime?
According to current income tax laws, individuals can choose either the old or new tax regime when filing their income tax return (ITR). This choice is independent of the regime selected for tax deduction on salary earlier in the financial year.
The CBDT has clarified that employers should ask their employees for their preferred tax regime for TDS purposes. This choice is solely for a tax deduction. Therefore, the tax regime selected during ITR filing can differ from the one chosen for TDS on salary. If someone picks the default tax regime (new tax regime) for TDS, they can still opt for the old tax regime when filing their income tax return.
How can an individual switch tax regime while filing ITR?
Section 115BAC of the Income-tax Act allows individuals (without business income) to choose their tax regime each year when filing their income tax return. The ITR form for FY 2023-24 (AY 2024-25) asks: “Do you wish to opt out of the new tax regime? (default is No).”
Selecting “No” calculates tax as per the new regime; “Yes” means the old regime. To switch, indicate your choice in ITR under Section 139(1). For business income, use Form No. 10-IEA before the due date. One-time switch back to new regime allowed, not too old.
Key points to keep in mind while changing tax regime
Deadline for Tax-Savings Investments
Ensure tax-savings investments and expenses are completed by March 31, 2025, when switching from the new to the old tax regime for FY 2024-25.
Benefits of Old Tax Regime
When transitioning to the old tax regime, individuals can claim deductions such as Section 80C for investments and expenses, Section 80D for health insurance, Section 80CCD (1B) for NPS contributions, HRA for rent, and LTA. To claim these deductions, individuals need to provide details and proof of the deductions to their employer.
Additionally, they can claim HRA exemption during the Income Tax Return (ITR) filing process. However, there is uncertainty about whether the claimed LTA during ITR filing will be accepted. It is advised to keep proofs of deductions handy since Form 16 will not include these details. Deduction details should be manually filled in the ITR form.
Switching from Old to New Tax Regime
Individuals moving to the new tax regime are eligible for two deductions: standard deduction from salary or pension and the employer’s contribution to the Tier-I NPS account. It’s important to note that both these deductions are also available in the old tax regime. When opting for the new regime in the Income Tax Return (ITR) form, individuals should ensure to claim these deductions in the income tax return form as well.
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