From April 1, 2023, if an individual taxpayer has not opted for the old tax regime, the employer would be deducting tax on salary (TDS) on the basis of the new tax regime. This is because the new tax regime became the default tax regime from FY 2023-24.
The Central Board of Direct Taxes (CBDT) in an April 2023 circular on this subject is silent on whether an employee can switch the tax regime during the financial year. This means that there is no clarity whether an employee who had opted for the new tax regime in April 2023 can change his/her mind and move to the old tax regime in January 2024.
Tax experts say employees can change their tax regime during the financial year depending on the company’s policy. However, some employers may not allow employees to change the tax regime (from new to old or vice-versa) during the financial year.
When can an individual change the tax regime opted earlier?
Current income tax laws allow an individual to select either old or new tax regime at the time of filing an income tax return (ITR). The tax regime can be chosen irrespective of what was chosen for the purpose of tax deduction on salary earlier in the financial year.
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Naveen Wadhwa, Vice President-Research & Advisory, Taxmann, says, “The CBDT clarified that the employer shall seek information from each of its employees who have salary income regarding their intended tax regime, and each employee shall intimate the same to the deductor. It is to be noted that this intimation shall be for the purpose of tax deduction only. Therefore, the tax regime at the time of filing of income tax return could be different from the tax regime chosen at the time of intimation for TDS on salary. If a person opts for the default tax regime (new tax regime) while furnishing the intimation to the employer, he can still opt for the old tax regime while filing income tax return.”
Abhishek Soni, CEO of Tax2Win.in, says employees sometimes opt for the new regime for TDS on salary but may want to change it later. In this case, they can do so at the time of filing the ITR, he says.
How individual can switch from one tax regime to the other while filing ITR
Section 115BAC of the Income-tax Act, 1961, deals with the new tax regime. The section allows an individual to select the tax regime in each financial year (if there is no business income) at the time of filing income tax return. The income tax return form provides an option to select the tax regime under which an individual wants his/her income to be assessed for a particular financial year.
The income tax return forms for FY 2023-24 (AY 2024-25) have been notified by the CBDT. The notified ITR forms asks the individual “Do you wish to exercise the option u/s 115BAC(6) of opting out of new tax regime? (default is No)”.
If the option “No” is selected, the income tax return form will calculate the amount of income tax payable as per the slabs of the new tax regime. If the individual selects “Yes”, the message to the income tax department is that he wants to opt for the old tax regime. In such a case, the income tax payable will be calculated on the basis of income tax slabs in the old tax regime.
Wadhwa says, “To switch from the new tax regime to the old tax regime or vice-versa, the individual must indicate his choice of tax regime in the ITR form to be filed for the relevant assessment year under Section 139(1). An individual having income from a business or profession (income from derivatives or options) can also opt out of the new tax regime and switch to the old tax regime for a relevant year. However, he has to exercise this option in Form No. 10-IEA on or before the due date for filing the income tax return under Section 139(1) for such a year. Once opted for, they have a once-in-a-lifetime option to switch back to the new tax regime. After that, they cannot opt for the old tax regime.”
Things to keep in mind while changing tax regime
If you are planning to switch from new tax regime to old tax regime at the time of filing income tax return, you must complete your tax-savings investments and expenditures by March 31, 2024. The old tax regime allows an individual to claim the benefit of various tax exemptions and deductions from income. The commonly availed deductions and tax exemptions are – Section 80C for specified investment and expenditures, Section 80D for premium paid for health insurance policy or senior citizen medical bills, Section 80CCD (1B) for investment in National Pension System (NPS), House Rent Allowance (HRA) for rent paid during the financial year, Leave Travel Allowance (LTA).
If an individual does not give the details and proofs of the deductions that he/she wants to claim (under old tax regime) to his employer, the benefit can still be claimed at the time of filing tax return. Even the HRA exemption can be claimed at the time of filing ITR. However, there is no clarity among tax experts whether LTA claimed at the time of filing ITR would be accepted by the income tax department.
The proofs of deductions claimed should be kept handy by the ITR filer because the Form 16 – TDS certificate given by employer- will not have any deductions and tax exemption details. Hence, one would need to manually fill-in these details in the ITR form and also preserve the proofs in case the income tax department asks for them later.
However, if the change of tax regime is done from old to new, then an individual is eligible for two deductions. Under the new tax regime, an individual is eligible to claim – a) standard deduction from salary or pension and b) Employer’s contribution to employee’s Tier-I NPS account.
It is important to note that both the deductions are also available in the old tax regime as well. Hence, these will be mentioned in the Form 16. While opting for new tax regime in ITR form, ensure that these deductions are claimed in the income tax return form as well.