Tax Regime Switch Mid-Year: Clarifications Needed After Budget 2024 Changes

With the recent sweetening of the new tax regime in Budget 2024, many salaried taxpayers are now questioning whether they can change their tax regime choice mid-year. The Finance Minister’s announcements on July 23 have introduced attractive revisions to the new tax regime, raising concerns among employees who had initially opted for the old regime.

Current Dilemma

Employees who chose the old income-tax (I-T) regime at the start of the financial year 2024-25 and now wish to switch to the newly revised regime face uncertainty. The confusion stems from a 2020 Central Board of Direct Taxes (CBDT) circular, which stated that once an employee’s regime choice was communicated to their employer, it could not be changed during the financial year. This was further complicated by the CBDT’s April 2023 update, which reiterated the need for early declarations for TDS calculations.

Need for Clarity

Tax experts, including Chartered Accountants, are pressing the income tax department for clarification on whether employees can alter their tax regime choice after the initial declaration. They argue that an update to the CBDT circular might be necessary to accommodate the new provisions and allow employees to benefit from the recent Budget changes.

Mayank Mohanka, CA and Founder-Director at TaxAaraam.com, emphasizes the need for an addendum to the circular. “Employees should be able to revise their declarations to reflect the new benefits introduced in the Budget,” he says.

Employer Flexibility

Some experts believe that while legal restrictions may not explicitly prevent mid-year changes, practical issues might arise for employers. Naveen Wadhwa, Vice-President at Taxmann, suggests that while employers could theoretically allow changes, administrative challenges might limit this flexibility. In such cases, employees might have to wait until they file their tax returns to claim refunds for excess tax deductions.

Calls for Immediate Action

Chartered accountants and tax professionals have urged the CBDT to provide immediate clarity on this issue. They have submitted requests to facilitate regime switches within the year to take advantage of the updated tax benefits. Bhavesh Shah, Senior Partner at Hasmukh Shah & Co LLP, supports this move, advocating for the option to switch now given the mid-year changes.

Future Prospects

While salaried individuals can switch tax regimes annually when filing their returns, the current framework requires employees to finalize their choice by April for TDS purposes. If the laws change mid-year, adjustments should ideally be accommodated.

The tax community is awaiting an official response from the CBDT. An enabling provision would allow employers to adjust employees’ tax regime preferences in light of the new Budget measures, ensuring that taxpayers can benefit from the latest revisions.

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