The ₹12 lakh income-tax threshold under the new tax regime has brought welcome relief to individual taxpayers. But for people earning income from a business or profession, the headline number can create a false sense of security.
Being below ₹12 lakh does not, by itself, guarantee that there will be no tax liability or demand. The applicable tax regime, the nature of income and, importantly, compliance with the prescribed procedure can all determine the final tax outcome.
The new tax regime is the default regime. For taxpayers earning only salary, interest or other non-business income, switching between the old and new regimes is relatively flexible. They can generally choose their preferred regime each year while filing their return. A tick in the appropriate box is usually enough.
The rules are different for individuals with business or professional income. For them, opting out of the default new regime, or subsequently returning to it, involves a specific compliance process. More importantly, they cannot move freely between the two regimes year after year. Once they opt for the old regime, they get only one opportunity to switch back to the new regime as long as they continue to have business or professional income.
Not just a tick box
A business or professional taxpayer who wants to move out of the default new regime may select the old regime while filing the income-tax return. But that alone is not enough. Form 10-IEA must also be furnished within the prescribed time to exercise the option validly. Otherwise, the tax department will compute the liability under the default regime.
The form also comes into play when a taxpayer who had earlier opted for the old regime wants to return to the new regime. Failing to follow the prescribed process can result in the department not accepting the intended regime.
One of our clients learnt this the hard way this year. The taxpayer reported total income of ₹11,75,590, below the ₹12 lakh threshold. The return was filed within the applicable due date and there was no apparent arithmetic error. Yet an intimation under Section 143(1) resulted in a tax demand of ₹182,740.
On examining the return and the applicable compliance requirements, we found that the taxpayer had selected the new tax regime but had not furnished Form 10-IEA. The department consequently processed the return under the old regime.
Fortunately, the intimation came before the applicable deadline of 31 August, allowing us to rectify the position by furnishing the required form. Had the statutory deadline already passed, the taxpayer could have been left with the tax demand.
Think long-term
Regime selection requires precision for individuals with business income, not only from a compliance perspective but also for long-term tax planning. A deduction that makes the old regime attractive in one year may not justify giving up the flexibility associated with the new regime in subsequent years.
Taxpayers should therefore evaluate their likely tax position over several years rather than simply choosing the regime that produces the lower tax bill in the current year.
What if your income profile changes?
Consider a consultant who works independently from April to July, becomes an employee from August to December and resumes consulting from January. Although salary may be an important component of the year's income, the person has also earned professional income during the financial year.
Such a taxpayer should not assume that the rules applicable to someone with only salary income automatically apply to them. The presence of business or professional income means the provisions relating to Form 10-IEA need to be examined.
The same principle applies to professionals who move between employment and independent practice during the year.
For business owners and professionals, therefore, tax-regime selection is not merely a filing preference. It is a tax-planning decision with a compliance requirement attached to it.
If you have business or professional income and have opted for the old tax regime while filing your ITR, do not stop at the tick box. File Form 10-IEA as well. You can do so before 31 August. A small compliance lapse can otherwise turn an apparently tax-free income into an unexpected tax demand.
Ankit Gupta is a chartered accountant and managing partner at Ankit Mahesh Gupta & Associates.