How many times can you switch between income tax regimes?

How many times can I switch between the new tax regime and the old tax regime? Even as the new tax regime has completed five years, a confusion over this question continues to exist among many taxpayers. If you're also grappling with this question, this article will help clear the confusion.

Since financial year 2023-24 (assessment year 2024-25), the new tax regime is the default tax regime. This means that tax is automatically deducted under the new tax regime unless the taxpayer explicitly opts for the old tax regime.

However, the tax regime selection rules differ between individuals with salary income and those with incomes from business and profession.

Let's look at them one by one.

Tax regime selection rule for salaried taxpayers

Taxpayers with non-business income such as income from salary can switch between the new and old tax regimes every year. However, the choice of tax regime can be made only before the due date of income-tax return (ITR) filing.

"An individual with non-business income can switch between the new and old tax regimes every year. Within the same year, again it is emphasized that the choice of old tax regime can be made only before the due date of filing the return u/s 139(1) of I-T Act," the Income-tax department says on its website.

Salaried employees planning to switch to the old tax regime need to declare this to their employers at the start of the financial year. If they don't opt for the old regime, then their employers will automatically deduct taxes under the new tax regime.

But employees can switch between the income-tax regimes when filing ITR before the due date. The following two situations will make you understand this better:

• Situation 1: Your employer has deducted taxes from your salary under the new regime throughout the year, but at the time of filing the ITR, you realise that you can save more under the old regime.

In this case, you can opt for the old regime while filing your ITR and claim a refund if excess taxes have been deducted by your employer. However, this choice must be made before the due date of ITR filing.

• Situation 2: You opted for the old tax regime at the start of the financial year but when filing ITR before the due date, you realise that the new regime will help you save more.

In this case also, you can switch to the default regime while filing ITR and claim refund if excess taxes have been deducted by your employer.

Please note that salaried employees must declare their tax regime choice every year if they want their employers to deduct taxes under the old regime.

For example, if you have opted for the old tax regime in the current financial year, you will need to make the same choice again in the next financial year if you wish to continue. Otherwise, the new tax regime, which is the default, will automatically apply.

Tax regime selection rule for individuals with income from business/profession

A taxpayer having income from a business or profession cannot switch between tax regimes every year. If you have opted out of the new tax regime, you will get one chance to switch to the new regime. Once you switch back to the new regime, you won’t be able to choose the old regime again.

"An Individual, HUF, AOP (not being co-operative societies), BOI or Artificial Juridical Person with business or professional income will not be eligible to choose between the two regimes every year. Once they opt out of new tax regime, they have only one chance for switching to new regime. Once they switch back to the new regime, they won’t be able to choose old regime anytime in future," the Income-tax department says.

How to know which regime is better for you

The answer to which regime is better varies from one taxpayer to another. Both regimes have their advantages and disadvantages.

The old regime offers various deductions but at higher tax rates. In contrast, the new regime has done away with most of the deductions available under the old regime. But it offers lower tax rates.