Confusion Among Taxpayers Whether Changing Tax Regime Mid-Year Is Permissible

A notification from the Central Board of Direct Taxes last April 2020 said regime choice communicated to the employer cannot be changed during a year which raised confusion amongst the taxpayers, who are unsure if they can switch to the new tax regime from the one they first selected at the start of FY 24–25. Indeed, a subsequent circular of the CBDT in April 2023 which replaced the 2020 notification had spared employees the need to make declaration for case regime option for the fiscal 2024-25. Indeed, on this ground, employers have already deducted TDS from salaries for Q1.

Tax experts told the media that another addendum to the revised circular is needed to allow staff to modify their declarations post-budget. However, some experts believe that employees can be allowed to switch regimes during the financial year since the circulars bind only the income tax department, not the taxpayers. Alternatively, the employees who have missed applying for the special rate in the previous method anyway cut while filing returns and get a refund on the excess tax being deducted.

Also Read: ITR: When Will You Receive Your Income Tax Refund? Check the Details

Chartered accountants have issued separate letters to the I-T department, allowing mid-year switches. The staff normally declare in April the tax regime they would like to opt for and depending on the choice, their tax liability and the monthly deduction from salary is determined. Though salaried persons can change the regime while filing returns, they have to inform their employers about it in April.

Employees would have to wait till mid-2025 before they can file returns and claim refunds in case the new regime is found to be more beneficial. Budget 2024 has announced new tax slabs and higher standard deductions and hence more taxpayers are likely to opt for the new regime. CBDT may clarify this in turn will allow companies to change investment declarations.