5 points to consider before switching to new tax regime

Budget 2023 has made the new tax regime attractive. The government expects two thirds of all taxpayers to opt for it. ET Wealth tells you how to make an informed decision

1.Business income will mean additional compliances
Tax laws consider trading in derivatives and commodities, freelance work, income from YouTube or any other content publishing platform, among others, as business income. So if you are a salaried taxpayer who also has a business income, you need to show that separately while filing ITR 3 or 4. If you want to switch to the new tax regime, a declaration to the effect has to be given in Form 10IE. Even though Budget 2023 has made the new tax regime the default one, it is applicable from 1 April onwards. Therefore, the old tax regime is the default option for the current financial year. Sujit Bangar, Founder, Tax Buddy, says once taxpayers who have business income make the declaration in Form 10IE, it would be applicable for subsequent assessment years as well. “If the taxpayer with a business income is sure of migrating to the new tax regime, he should file ITR 3 or 4 and give Form 10IE while filing his return for 2022-23,” he adds

2.Home loan deduction only if property rented out
Under the new tax regime, a deduction for interest paid on housing loan can be claimed only if the said house for which the loan has been taken is rented out. Also, this deduction is limited to the amount of rent, and if you are charging a rent lower than the interest amount, then that loss can neither be set-off with any gains nor can it be carried forward. “I would advise taxpayers to factor in the home loan interest cost, which may rise or go down depending upon the nature of the home loan, and then decide to go for the new tax regime,” says Ruchika Bhagat, MD, Neeraj Bhagat & Co, a Delhibased chartered accountancy firm.

3.Some losses can’t be adjusted or carried forward

Taxpayers resort to loss harvesting to reduce tax liabilities arising from short-term capital gains. Losses are booked on existing investments to offset gains made on other investments to lower the tax outgo. The lossmaking investments are then bought back at market price to maintain the asset allocation plan. But this cannot be done in the new tax regime for certain assets. Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors, a Delhi- based law fi rm, says the new tax regime restricts carrying forward and setting off certain losses. “For those with carry forward of losses from the previous year, it’d be better if they opt for the old tax regime rather than the new one,” he says. One such restriction in the new tax regime pertains to income from house property which cannot be set off with any other heads of income as well as with any loss or depreciation from any earlier assessment year.

4.File ITR by 31 July to switch to new regime for 2022-23
If someone wants to switch to the new tax regime for the financial year 2022-23, then filing of original income tax return by 31 July 2023 is mandatory. Ankit Jain, Partner, Ved Jain & Associates, says, “I would advise one to be cautious and take care about tax regimes while fi ling the original ITR, because if a taxpayer files original ITR in old tax regime but later files a revised ITR in the new tax regime, the tax department may deny such claims.” From 2023-24, the new tax regime will become the default regime.

5.Non-salaried can switch regimes every year
If you only have a salary income, then you can switch between tax regimes each year. Non-salaried people can also do that, but only if they do not have any business income since taxpayers with a business income can’t always make the switch. “It will always be advisable to compare the regimes and then switch, as in the case of taxpayers having a business income, it may be difficult to switch back to the new regime, once they drop out,” Jain says.

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