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Is It Important to Choose the Right Tax Regime At The Beginning of the Financial Year?
Written by Gagandeep Arora Printed on - Date - 14th May 2024
The Indian income tax system witnessed significant changes with the introduction of the new tax regime in 2020, it gave taxpayers an alternative to the existing tax structure. In the Union Budget 2023, further changes were made, emphasising the importance of choosing the correct tax regime. But how crucial is it to select the right tax regime on time, and what impact does it have on your tax liability?
Why Is It Important to Select Your Tax Regime on Time?
Default Tax Regime
The Union Budget 2023 introduced a rule making the new tax regime the default option if an assessee does not declare their preference. This means that if you do not choose your preferred regime, you will automatically be assessed under the new tax regime, which might not always be beneficial for you. It's essential to declare your preference to ensure you are taxed under the regime that best suits your financial situation.
Maximising Tax Savings
Selecting the appropriate tax regime can significantly impact your tax savings. The old tax regime offers various deductions and exemptions, such as those under Chapter VI-A (sections 80C, 80D, etc.), which can reduce your taxable income. On the other hand, the new tax regime has lower tax rates but does not allow most deductions and exemptions. Evaluating which regime provides greater savings is vital for effective tax planning.
Compliance and Documentation
Choosing your tax regime on time ensures compliance with tax regulations and avoids any last-minute hassles during the ITR filing process. For those switching regimes, filing the necessary documentation, such as Form 10-IE for business/professional income earners, is critical to validate their choice.
Is there Flexibility for Salaried Taxpayers?
Salaried individuals have the advantage of switching their tax regime every financial year. Moreover, they can change their regime even at the time of filing their income tax return (ITR), regardless of the regime they followed during the financial year. This flexibility allows salaried taxpayers to optimise their tax liability based on the deductions and exemptions available under the old regime or the simplified tax slabs of the new regime.
Restrictions for Business/Professional Income Earners:
Taxpayers with income from business or profession face stricter rules. They are permitted to switch their tax regime only once. If they opt for the new tax regime, they cannot revert to the old regime in subsequent years. Therefore, it is important for these taxpayers to carefully evaluate which regime offers better tax benefits before making a decision. Once they decide, they must file Form 10-IE to declare their choice before filing their ITR.
The Union Budget 2023 introduced a rule making the new tax regime the default option if an assessee does not declare their preference. This means that if you do not choose your preferred regime, you will automatically be assessed under the new tax regime, which might not always be beneficial for you. It's essential to declare your preference to ensure you are taxed under the regime that best suits your financial situation.
Maximising Tax Savings
Selecting the appropriate tax regime can significantly impact your tax savings. The old tax regime offers various deductions and exemptions, such as those under Chapter VI-A (sections 80C, 80D, etc.), which can reduce your taxable income. On the other hand, the new tax regime has lower tax rates but does not allow most deductions and exemptions. Evaluating which regime provides greater savings is vital for effective tax planning.
Compliance and Documentation
Choosing your tax regime on time ensures compliance with tax regulations and avoids any last-minute hassles during the ITR filing process. For those switching regimes, filing the necessary documentation, such as Form 10-IE for business/professional income earners, is critical to validate their choice.
Is there Flexibility for Salaried Taxpayers?
Salaried individuals have the advantage of switching their tax regime every financial year. Moreover, they can change their regime even at the time of filing their income tax return (ITR), regardless of the regime they followed during the financial year. This flexibility allows salaried taxpayers to optimise their tax liability based on the deductions and exemptions available under the old regime or the simplified tax slabs of the new regime.
