If you neglected to choose a tax regime at the beginning of the financial year, there is no reason to worry as you can still switch regimes when filing your returns for a specific year.
The old tax regime offers numerous deductions and exemptions, which can lower taxable income, but it comes with higher tax rates. On the other hand, the new tax regime, introduced in 2020, features lower tax rates but provides fewer deductions.
Carefully evaluating income sources and potential deductions is essential in deciding which regime is more advantageous for one's financial circumstances.
Who Can Switch?
Individuals who do not have income from a business or profession enjoy greater flexibility in switching tax regimes. Starting from the assessment year 2023-24 (financial year 2023), the new tax regime is the default for these individuals. They can easily opt for the old regime while filing their Income Tax Return, as most ITR forms, such as ITR-1 (SAHAJ) and ITR-4 (SUGAM), include an option to select the preferred regime.
For those with business or professional income, including individuals and Hindu Undivided Families, switching to the new tax regime requires submitting Form 10IE. However, it's a one-time option for business owners or individual professionals or HUF. One has the option to either choose the new tax regime from the start and it cannot be changed in subsequent years.
Key Factors To Consider Before Switching
The tax regime one selects significantly affects benefits that can be claimed. It's essential to thoroughly evaluate tax-saving investment options, such as the Public Provident Fund or National Pension Scheme, and deductions like interest on a home loan, to ensure they align with the chosen regime. Planning tax-saving moves well in advance of the deadline is crucial for optimising tax outgo.
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