Understanding Tax Regime Choice for ITR Filing FY 2025-26
Choosing between the old and new income tax regimes is a critical decision for taxpayers filing their returns for the financial year 2025-26. The right choice can lead to significant tax savings, but the optimal regime may change each year based on an individual's financial circumstances. For example, purchasing a home may make the old regime more attractive due to deductions and exemptions, while repaying a home loan could reduce the need for those benefits, making the new regime preferable. This raises a key question: can taxpayers switch between regimes every year?
Switching Rules for Different Taxpayers
The new income tax regime is the default for individual taxpayers. However, taxpayers have the flexibility to opt for the old regime, but the frequency of switching depends on the nature of their income. According to Richa Sawhney, Partner Tax at Grant Thornton Bharat LLP, individuals with business or professional income face restrictions: once they opt for the old regime, the choice is binding for subsequent years. They can withdraw this option only once, unless they cease to have business or professional income.
In contrast, individuals without business or professional income enjoy greater flexibility. They can choose between the old and new regimes every year, effectively allowing an annual switch. Sawhney advises taxpayers to carefully evaluate the tax benefits under each regime before making a decision.
Deadline and Implications
Taxpayers can opt for the old regime only if they file their return by the July 31, 2026 deadline. Filing a belated return automatically places them under the old regime. Sawhney explains that the distinction between taxpayer categories reflects a policy choice: non-business taxpayers can revisit their choice annually, while business taxpayers face a tighter framework due to ongoing implications like depreciation and carried-forward losses. This ensures continuity and discourages frequent switching for year-specific tax advantages.
Key Considerations
For business income taxpayers, the choice is a longer-term strategic decision rather than a year-by-year one. The provisions of Section 115BAC apply to the FY 2025-26 return, filed in July/August 2026. Taxpayers should stay informed and consult professionals to optimize their tax savings.
