The government introduced a new income tax regime in the Union Budget 2020, offering taxpayers an alternative to the existing system. However, its adoption remained low. In the Union Budget 2023, Finance Minister Nirmala Sitharaman made significant changes to encourage more taxpayers to opt for the new regime, effective from the financial year (FY) 2023-24.
Old Tax Regime:
This system offers approximately 70 deductions and exemptions to help taxpayers reduce their taxable income. It includes a deduction of up to Rs 1.5 lakh under Section 80C of the Income-Tax Act (ITA), 1961. Taxpayers can continue using the old tax regime.
New Tax Regime:
The new tax regime features lower tax rates compared to the old regime and aims to simplify taxes. It eliminates most deductions and exclusions, except for deductions under Sections 80CCD(2) and 80JJA for business income. The new tax system is now the default regime. Under the new tax regime, the basic exemption limit has been raised, and the rebate has been increased to Rs 7 lakh. The basic deduction has been reintroduced, while the surcharge has been reduced.
Switching Between Tax Regimes:
Taxpayers can choose between the old and new tax regimes each financial year, depending on their income.
For Salaried Individuals:
They can switch between the regimes each financial year. Although the new tax system is default in FY 23-24, taxpayers can revert to the previous regime based on their income.
For Business/Professional Individuals:
They can also switch between the regimes, but only once in their lifetime. For example, if a businessperson switches from the old regime to the new regime in FY 2023, they cannot switch again. Taxpayers with company income who opt out of the new regime cannot opt back in later.
Switching Process:
Select the Regime: Choose between the old and new tax regimes. Check Eligibility: Ensure eligibility for the selected regime. Salaried individuals can choose directly on their ITR form. Individuals with business/professional income must complete Form 10IE by July 31 of the Assessment Year (AY). Follow These Steps:
For Salaried Individuals:
Open the relevant ITR form (e.g., ITR-1 or ITR-2). Select the ‘New Tax Regime’ option. Fill in the remaining sections and submit the ITR. For Business/Professional Individuals: Download and complete Form 10IE. Submit Form 10IE by July 31 of the AY. File the ITR by selecting the ‘New Tax Regime’ option. Switching to the Old Regime: This option is available only if a taxpayer hasn’t switched previously. Download and complete Form 10IE.
Check and Submit: Verify the ITR details carefully. Authenticate the ITR electronically using Aadhaar OTP or PAN and bank details. Once a taxpayer has selected their preferred tax regime, they must submit the ITR electronically. It’s important to note that deductions or exemptions allowed under the previous regime cannot be claimed on the current year’s return. File the ITR without specifying a particular regime.
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