India’s tax regime takes a major change in financial year 2023-24 and new tax regime is made effective from this year for all taxpayers. This change means that every salaried employee has to express his/her preference for the tax regime at the start of each financial year. If they do not indicate their choice for the old tax regime, then the new system will be used to compute taxes.
It is, therefore, important to know when and how one can move between the tax regimes because this information is useful for people with non-business income. As stated by the Income-tax department, ”An individual with non-business income can opt for the old and new tax regimes every year.” However, it has to be done before the due date of filing the return of income under section 139(1) of the Income-tax Act.
The ability to change the two regimes for those with business or professional income is more constrained. These people cannot do the switching every year. The Income-tax department notes that, “Any person who has business or professional income cannot opt to move from the new regime to the old regime every year. Once a person with business or professional income chooses the new regime, he or she can only switch to the old regime once. They cannot switch back to the old regime after that.” This provision therefore has important implications for business professionals who must get it right the first time, given that they have very limited room to change their strategy in the future.
Salaried employees can change their regime on the IT return that they are submitting, if they are able to do so before the due date. If there is over extraction of tax through the new regime, they can go for the old regime at the time of return filing and claim the differential amount as refund.
The old tax regime offers many exemptions but the tax rates are higher than the new regime which provides limited exemptions but at lower rates. It is therefore important for an individual to know his or her financial status and compare the amount of tax to be paid and the amount of duty to be forgiven.
This change reveals therefore the importance of the taxpayers to be sensitive to the tax regime they choose every year and to manage their finances well, particularly for those in business where there are limited possibilities of switching.
