Salaried taxpayers can switch regimes annually, while business owners face limits and need Form 10-IEA. Learn the rules and steps here.
Yes, taxpayers have the option to change their tax regime at the time of filing their Income Tax Return (ITR). For salaried individuals, the choice between the old and new tax regimes remains flexible, allowing them to switch every assessment year. However, effective from FY 2023-24, the new tax regime has become the default setting.
In contrast, individuals earning income from a business or profession are permitted to switch back to the old regime only once in their lifetime. To exercise this option and revert to the old framework, they are required to submit Form 10-IEA in accordance with Income Tax regulations.
Comparison: Old Tax Regime vs. New Tax Regime
The old tax regime allows taxpayers to utilize a wide range of exemptions and deductions for various investments and expenditures. Common examples include deductions under Section 80C, 80D for health insurance, housing loan interest, and HRA. This structure typically benefits those with significant eligible expenses and investments, as it substantially lowers their taxable income base.
Conversely, the New Tax Regime provides reduced tax rates and an increased basic exemption limit. However, it eliminates most deductions, retaining only a few such as Section 80CCD(2) for employer NPS contributions and Section 80JJAA for business recruitment. Consequently, taxpayers who claim fewer deductions and prefer a simpler tax structure generally find the new tax regime more advantageous.
Taxpayers must weigh the pros and cons of each system to ensure efficient tax planning.
Eligibility to Switch Between Regimes
Salaried Taxpayers: Those filing ITR-1 or ITR-2 retain the right to toggle between the two regimes annually. They should evaluate their total income and investments each year to determine the most beneficial option. Even if an employee declares a specific regime to their employer at the start of the fiscal year, they can still alter this choice when filing their return. Note that if no choice is communicated to the employer, tax deducted at source (TDS) will be based on the default new regime.
Taxpayers with Business/Professional Income: Individuals filing ITR-3, ITR-4, or ITR-5 have a restricted option. They can opt out of the new regime to join the old regime only once in their lifetime by filing Form 10-IEA. Once they opt back into the new regime after switching, they are barred from returning to the old regime in the future.
Implications of Not selecting a Regime
Because the new tax regime is the default, if a taxpayer fails to actively select a preference, their tax liability will automatically be computed under the new regime rules. The law provides the flexibility to opt out of this default setting and adopt the old regime, provided the choice is exercised before the ITR filing deadline for that assessment year.
Procedure to Change Tax Regime in ITR
Switching regimes is straightforward for many. In ITR 1 and ITR 2, the form includes a specific question: “Do you wish to exercise the option u/s 115BAC(6) of opting out of the new tax regime (default is ‘No’)?”. Selecting ‘No’ implies continuing with the new regime, while selecting ‘Yes’ indicates a switch to the old regime.
However, for filers of ITR 3 and ITR 4 who wish to move from the default new regime to the old regime, submission of Form 10-IEA is mandatory on or before the filing due date.
Understanding Form 10-IE vs. Form 10-IEA
Taxpayers often confuse these two forms for AY 2025-26. The distinction is as follows:
| Form 10-IE | Form 10-IEA |
|---|---|
| Previously used to opt into the new tax regime. | Currently used to opt into the old tax regime. |
| Obsolete, as the new regime is now the default. | Mandatory for ITR-3 or ITR-4 filers for AY 2025-26 if they wish to use the old regime. |
Steps to File Form 10-IEA
To submit Form 10-IEA, follow these steps:
- Log in to the Income Tax portal with your PAN and password.
- Navigate to e-file > Income Tax Forms > File Income Tax Forms.
- Locate Form 10-IEA in the list or search bar and click ‘File Now’.
- Select the appropriate Assessment Year.
- Review the required documents and click ‘Let’s get started’.
- Confirm ‘Yes’ for having business/professional income, select the due date, and proceed.
- Confirm the choice to switch from the new regime to the old regime.
- Verify Form Details:
- Basic Info: Verify pre-filled PAN and name. Select the ‘opt-out’ option if doing so for the first time.
- Additional Info: Enter IFSC unit details if applicable (greyed out if opting out).
- Verification: Agree to the declaration.
- Verify the submission using Aadhaar OTP, DSC, or EVC.
- Submit the form and save the acknowledgement number/Transaction ID for your records.
Key Considerations Before Switching
Changing your tax regime impacts your tax liability and exemption limits. Review these points before deciding:
- Understand the Regimes: Analyze rates and available exemptions to maximize savings.
- Calculate Liability: Estimate the tax payable under both scenarios based on your specific income and deductions.
- Impact on Savings: Recognize that shifting to the new regime may nullify the tax benefits of certain existing long-term investments.
- Documentation: Ensure you have proofs for all deductions claimed if you choose the old regime.
- Long-term Planning: Assess how the change aligns with your broader financial goals and life events.
Conclusion
Taxpayers certainly have the option to switch regimes. Salaried individuals enjoy annual flexibility, whereas those with business income must file Form 10-IEA to opt for the old regime, with stricter limitations on switching back. Always prioritize comprehensive tax planning and review your financial objectives before finalizing your choice.
