As the income tax return (ITR) filing season gathers pace, many taxpayers are once again asking the same question: should they stick with the old tax regime or move to the new one? While choosing the right regime can help reduce tax liability, many people are still unsure about one important rule, i.e., how often can they switch between the two?
The answer depends largely on the source of your income. For some taxpayers, switching is quite flexible. For others, the rules are much stricter and can have long-term implications.
The government made the through the Finance Act, 2023. It offers lower tax rates and a higher rebate but removes most exemptions and deductions that were available under the old regime.
With income up to Rs 12 lakh becoming effectively tax-free under the new regime from FY 2025-26 due to the enhanced rebate, many taxpayers may find the simplified structure attractive. For salaried individuals, the tax-free threshold rises to Rs 12.75 lakh after accounting for the standard deduction.
However, the decision becomes more complicated for those who claim deductions on investments, insurance premiums, home loans and other tax-saving expenses.
The good news for salaried employees is that they enjoy considerable flexibility.
According to CA (Dr) Suresh Surana, “The Finance Act 2023 has made the new tax regime as default tax regime. However, individual taxpayers can switch between old and new tax regime on a year-on-year basis.”
This means salaried individuals can review their income, deductions and tax-saving investments every financial year and choose whichever regime works best for them.
For instance, if a taxpayer has made substantial investments eligible under Section 80C or is claiming home loan benefits in one year, the old regime may be beneficial. In another year, if deductions are limited, the new regime could offer greater savings.
While salaried taxpayers can switch every year, there is one important step they should not overlook.
Surana explains, “Such salaried employees are required to provide intimation regarding their choice of tax regime to employers in the beginning of the financial year. Failure of same will result in deduction of TDS according to the default tax regime, i.e. the new tax regime.”
In simple terms, if employees do not communicate their preferred regime to their employer, tax deducted at source (TDS) will generally be calculated under the new regime.
However, taxpayers still get another opportunity to make their final choice when filing their return.
“Nevertheless, the final choice of tax regime can be made by the employee at the time of furnishing the tax return,” Surana adds.
The flexibility available to salaried employees does not apply to everyone.
Individuals earning income from business or profession face tighter restrictions when it comes to switching tax regimes. Once such taxpayers opt out of the new tax regime under Section 115BAC and move to the old regime, they cannot freely switch every year.
According to Surana, taxpayers with business or professional income who have exercised the option of opting out of the new regime can exercise the option of returning to the new regime only once.
This makes the decision far more important for entrepreneurs, freelancers, consultants and professionals, as a wrong choice may limit future flexibility.
For taxpayers earning up to Rs 12 lakh, the new tax regime is increasingly emerging as the preferred option because of the higher rebate and simpler tax structure.
However, taxpayers with higher incomes should carefully before making a decision. The old regime still offers deductions under Sections 80C, 80CCD, 80D and 24(b), covering investments, retirement contributions, health insurance premiums and home loan interest.
Before finalising a choice, it is advisable to calculate tax liability under both regimes and assess future income, investments and deduction claims.
Ultimately, there is no one-size-fits-all answer when it comes to choosing between the old and new tax regimes. The right option depends on your income, investments and the deductions you are eligible to claim. As the ITR filing deadline approaches, taking a few minutes to compare both regimes could help you avoid unnecessary tax outgo and make the most of the benefits available.