Summary of this article
For most individual taxpayers, including salaried employees, pensioners, and those earning rental, interest, or capital gains income, the laws are quite flexible.
The laws are stricter for individual taxpayers who earn income from a business or profession, such as business owners, consultants, freelancers, doctors, lawyers, or other professionals.
If an individual taxpayer no longer has any business or professional income in a later year, the restriction ceases to apply.
With the New Tax Regime becoming the default tax regime for individual taxpayers, many taxpayers are wondering whether they can opt out of the New Tax Regime and switch back to the Old Regime. They are also confused about how many times they can switch back and forth.
Well, the simple answer to that is based on just one criterion - Do you have income from a business or profession?
If You Are A Salaried Employee Or Do Not Have Business Income
For most individual taxpayers, including salaried employees, pensioners, and those earning rental, interest, or capital gains income, the laws are quite flexible.
These individual taxpayers can choose between the Old and New Tax Regimes every year while filing their income tax return. In other words, you are not locked into one regime permanently and can review your tax position annually.
“For example, if you claim deductions such as House Rent Allowance (HRA), home loan interest or investments under Section 80C of the Income Tax Act, you may end up paying less tax under the Old Tax Regime. However, if you do not claim such deductions, the New Tax Regime, which offers lower tax rates but fewer tax benefits, may be a better choice,” says Harsh Rustagi, Consultant, Nangia & Co LLP.
It is also important to note that even if your employer has deducted TDS under a particular tax regime, you can still choose a different regime while filing your income tax return.
If You Have Business Or Professional Income
The laws are stricter for individual taxpayers who earn income from a business or profession, such as business owners, consultants, freelancers, doctors, lawyers, or other professionals.
Such taxpayers do not have the flexibility to switch between the two regimes every year.
Once they opt out of the default New Tax Regime and choose the Old Tax Regime, that choice generally continues for future years. The law allows only a one-time opportunity to switch back.
Simply put:
• An individual taxpayer with business or professional income can change the chosen tax regime only once after making the initial choice.
• After exercising this one-time switch, they cannot keep moving between the Old and New Tax Regimes every year.
“Because of this restriction, business owners and professionals should carefully evaluate their long-term tax position before deciding which regime to opt for,” suggests Rustagi.
What Happens If Business Income Stops?
There is an important exception to this.
If an individual taxpayer no longer has any business or professional income in a later year, the restriction ceases to apply. In such a case, the taxpayer is treated like any other individual taxpayer and can freely choose between the Old and New Tax Regimes every year.
How Is The Choice Made?
Individual taxpayers having business or professional income are required to exercise their option within the prescribed due date for filing their income tax return. The choice is made through the prescribed form and reporting requirements in the income tax return.
The Bottom Line
Whether you can switch tax regimes every year depends entirely on the nature of your income.
“If you are a salaried employee or do not have business income, you can choose the tax regime that works best for you every year. However, if you have business or professional income, your flexibility is significantly restricted, and the decision can have long-term consequences,” says Rustagi.
Therefore, before choosing a tax regime, it is advisable to compare the tax liability under both options and consider not only the current year's savings but also the impact on future years.
