Midyear Tax Regime Switch: Salaried individuals who initially opted for the old income-tax (I-T) regime at the start of the 2024-25 financial year may now find themselves in a difficult position if they wish to switch to the new tax regime. During the Union Budget speech on July 23, Finance Minister Nirmala Sitharaman enhanced the appeal of the new regime to the taxpayers.
However, the question remains: Can they revise their investment declarations — particularly their choice of tax regime — submitted to employers earlier in the year to indicate their intention to switch to the new tax regime within this financial year?
Tax experts have clarified whether a salaried taxpayers could actually switch regime midyear.
Rahul Charkha, Partner at Economic Laws Practice, told ABP Live that the ability to switch between different tax regimes depends on the source of income. "Persons earning income other than that from business or profession (i.e., salary, house property, capital gains and income from other sources) are free to switch regimes every financial year in the ITR. If a salaried employee wishes to switch between regimes during midyear, the employee will have to intimate the employer about such a switch. Even if another regime was opted at the time of TDS during the start or mid of the year, the tax regime can still be switched at the time of filing ITR before the due date (switch not possible in case of belated ITRs)."
However, Charkha said business or professional income earners cannot exercise the option to switch regimes every year but can switch only once in their lifetime. "Such option can be exercised by filing Form 10IE latest by the due date for filing ITR," he added.
Currently, employers usually permit their employees to select their preferred tax regime when submitting investment declarations at the beginning of the financial year in April. Based on these declarations, the tax liability for the year is calculated, and corresponding deductions are made from their monthly salary.
Confusion on Tax Regime
The tax confusion stems from a notification issued by the Central Board of Direct Taxes (CBDT) in April 2020, shortly after the new tax regime was introduced in the 2020 Budget.
In the circular CBDT stated, "…the intimation so made to the deductor (employer)...cannot be modified during that year".
New Tax Regime becomes Default Framework
Starting from the 2023-24 financial year, the new tax regime has become the default framework. As a result, any midyear changes in tax rates and rules could mainly pose difficulties for individuals looking to switch from the old regime to the new one. However, those who either informed their employers of their preference or opted for the new regime in April are less likely to encounter issues.
Ritika Nayyar, partner at Singhania & Co, explained that ideally in case of salaried people, they are asked their preference of regime in the beginning of the year, and they are not allowed to shift once chosen for the year, but can change at the time of ITR filing.
"This time, however, the Union Budget in July made some midyear changes. Therefore, individuals may feel the need to opt into the new regime if it’s more beneficial, taking into account, few revisions in slabs, increased standard deduction etc." Nayyar pointed out.
New CBDT Circular Needed
She highlighted that the CBDT did come out with circulars in past years where they said one could choose only in the beginning of the year. "The CBDT should come out with a circular soon to that effect and clarify the same. However, if the current situation is relied upon and taking a conservative view, the employees may not be able to change regimes midyear and may only have that option at the time of filing their ITR which will be in July 2025," she said.
It would be ideal if pursuant to some clarification by CBDT, corporates/ employers do give an option to the employees midyear, such that they don’t have to eventually bear more tax first and take tax refunds later during filing ITR, instead, tax liability be adjusted within the monthly deductions, Nayyar opined.