Switching from Old Tax Regime to New Tax Regime

Many individuals have been considering switching from the old to new tax regime. This is because Budget 2025 has made the new tax regime a tempting option. It provides  complete tax exemption to those making an income up to Rs. 12 lakh a year. It raises the basic exemption limit to Rs. 4 lakh and widens the tax slabs. If you want to switch from the old tax regime to the new tax regime, we recommend you to go through this article!

Understanding Old & New Regimes

For individuals having substantial investments and high expenses, the old regime is ideal. This is because the old regime enables deductions and exemptions under various sections of the Income Tax Act 1961. Some sections are Section 80C, 80D, LTA and HRA.  

On the other hand, the new regime has lower tax rates as compared to the old regime. However, the new tax regime excludes most of the deductions. This makes it a more appropriate option for individuals who have less complex income sources. For individuals who earn less or have very small investments, the new regime’s especially beneficial. They do not require detailed tax planning. 

Tax Rates: Old Regime vs New Regime

Here are the tax rates for both old and new tax regimes:

Who can Switch between Old and New Tax Regimes?

To answer this question, both salaried individuals and those getting income from business/profession can switch between the old and new tax regimes. However, between these groups, the flexibility and rules differ majorly.

Each financial year, the salaried individuals can choose the tax regime of preference. Because of this annual flexibility, they can reassess their financial condition, deductions and exemptions on a regular basis. This allows them to optimize their tax savings on the basis of changes in their income/financial objectives.

For individuals earning income from a business or profession, the option to switch between the old and new tax regimes is significantly limited. They are permitted to make this switch only once in their lifetime. If such a taxpayer initially goes for the new tax regime and later decides to revert to the old regime, this change is allowed only once. After switching back to the old regime, they cannot choose the new regime again in future years unless they no longer have business income. This one-time switch necessitates careful consideration as it has long term implications for tax planning and their overall financial strategy.

Salaried Individuals: Freedom to Switch Every Year

If you’re a salaried individual in India, you now have the flexibility to switch between the old and new tax regimes every financial year. This is a result of the changes announced in the Union Budget 2024-25. This means you can reassess your finances each year and pick the regime that works best for you.

The old tax regime is ideal if you’re making use of multiple deductions and exemptions, such as those under Section 80C (up to Rs. 1.5 lakh), Section 80D (medical insurance), HRA, and others. These benefits can considerably lower your taxable income, making the old regime a great option for those who have significant investments in savings plans, insurance, or housing loans.

On the other hand, if you don’t have many deductions to claim, the new tax regime could suit you better. It offers lower tax rates across income slabs but does away with most exemptions and deductions. Under the new regime, income up to Rs. 3 lakh is completely tax-free, and if your income is up to Rs. 7 lakh, you get a full rebate under Section 87A, meaning you won't pay any tax at all.

Since your financial situation can change over time, it is smart to review your income, investments, and expected deductions every year. This annual flexibility can help you make the most of your money, adapting your tax strategy as your needs and goals evolve.

Business and Professional Income Earners: One Lifetime Switch

For those earning income from business or profession, the rules are much stricter. You can switch between the old and new tax regimes only once in your lifetime as long as you have business income. Once you’ve made the switch, you’re locked into your choice unless you completely stop having any business or professional income.

This decision is a big one and has lasting consequences. While the old regime allows you to benefit from a wide range of deductions and exemptions to lower your tax bill, the new regime offers lower tax rates but takes away most of those benefits. So, choosing between the two isn’t just about immediate tax savings. It’s about aligning your choice with your long term financial strategy.

Because you can’t keep changing your mind later, it’s important for business owners and professionals to consult a tax advisor before deciding. A professional can help you map out the best option based on your current income, possible deductions, and future financial plans. Careful planning today can make a big difference in how much tax you pay over the years and how well you meet your financial goals.

Things to Keep in Mind Before Switching Regimes

It is important for you to keep certain things in mind before you switch between the old and new tax regimes.:

• The old tax regime gives you access to different kinds of deductions and exemptions like those for investments, insurance premiums, and loan interests. All this helps you cut down your taxable income significantly.

• The new tax regime makes things simpler for you as it offers lower tax rates. However, it tends to cut out most of these deductions and exemptions.

• Choosing between the two means you need to think about how each regime fits with your long term financial goals and not just your immediate tax savings.

• Administrative steps matter too. For example: if you want to go for the old regime, you’ll need to file Form 10IE. Filing this form is necessary to officially inform the Income Tax Department the regime of your preference.

• Switching tax regimes isn't just about saving money this year; it could impact your overall financial plan, so it's smart to get professional advice before making a decision.

• If you forget to select a regime at the start of the financial year, the new tax regime automatically kicks in for salaried employees.

• Employers are required to deduct TDS based on the new regime if you haven’t made an explicit choice.

• Even if you missed choosing the regime earlier, you don’t have to worry. When you file your ITR, you can still pick your preferred regime at that time.

• During ITR filing, you get the chance to review your income/deductions/tax liability. Accordingly, you can decide which regime is better as per your situation.

How to Switch Between the Two Regimes?

You can switch from one tax regime to the other with a single click. ITR 1 and ITR 2 forms ask the taxpayer whether they wish to exercise the option u/s 115BAC(6) of opting out of the new tax regime. 

If you choose ‘No’, you will file your tax return and calculate your tax liability as per the new tax regime. If you choose ‘Yes’, it means you have switched from the new tax regime to the old tax regime. 

However, in case of IITR 3 and ITR 4, you will have to file form 10 IEA on or before the due date July 31st 2025 to change your tax regime from default regime to the old tax regime.

Conclusion

Before you switch between the old and new regime, it is important that you take into account your financial situation, deductions, and long term goals. If you need professional advice for deciding which regime would be better for you, contact Registrationwala’s consultants. We can also help you file Income Tax Return as per the regime you prefer. 

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.