Mistakes to Avoid While Choosing a Tax Regime
- PRITI SIRDESHMUKH
- 6 hours ago
- 9 min read
Choosing the right tax regime in India is one of the most important financial decisions for any taxpayer. With two options available under the Income Tax Act, 1961—the old regime with multiple deductions and exemptions, and the new regime with lower tax rates but limited benefits—picking the right one can significantly impact overall tax liability. Many individuals make avoidable mistakes such as failing to compare both regimes, claiming ineligible deductions, or not informing their employer in time. Understanding these pitfalls ensures smoother compliance, better savings, and a stress-free filing process.
Table of Contents
Mistakes to Avoid While Choosing a Tax Regime
Mistakes to avoid while choosing a tax regime are often overlooked, yet they can have a lasting financial impact. The Indian Income Tax Act, 1961 provides taxpayers with two distinct options: the old regime and the new regime. The old regime is structured around a wide range of deductions and exemptions, such as those available under Section 80C for investments, Section 80D for health insurance premiums, and exemptions for house rent allowance or leave travel allowance. These benefits can significantly reduce taxable income, but they require proper documentation and disciplined financial planning. On the other hand, the new regime simplifies the system by offering reduced tax rates spread across wider income slabs but eliminates most exemptions and deductions. This approach is designed for individuals who prefer straightforward compliance and do not invest heavily in tax-saving instruments.
The challenge arises when taxpayers fail to evaluate their financial profile carefully before making the choice. Selecting a regime without comparing tax liability under both systems can lead to paying higher taxes unnecessarily. For instance, a salaried individual with substantial investments in provident funds, insurance, and home loans may save more under the old regime, while someone with fewer deductions may benefit from the new regime’s lower rates. Mistakes such as claiming deductions that are not permitted in the new regime, overlooking the impact of future financial commitments, or not informing the employer about the preferred option can complicate matters further.
Incorrect regime selection also has consequences beyond immediate tax liability. Filing returns with wrong claims may invite scrutiny from the Income Tax Department, resulting in delays, penalties, or notices. Furthermore, it can disrupt long-term financial planning by misaligning tax benefits with goals like retirement savings, homeownership, or education funding. A thoughtful assessment of income sources, eligibility for deductions, and long-term plans is essential before deciding. Tools such as tax calculators or professional advice from platforms like TaxBuddy can simplify the comparison, helping taxpayers make informed choices that align with their financial objectives.
By recognizing these pitfalls early and approaching the decision with clarity, taxpayers can ensure not only compliance but also maximized savings. The right tax regime choice is not just about the present year’s return; it is a step toward building a consistent and tax-efficient financial strategy.
Choosing Without Proper Comparison of Old and New Regimes
One of the most frequent mistakes is selecting a tax regime without a thorough comparison. The old regime provides deductions under sections like 80C, 80D, HRA, and home loan interest, whereas the new regime focuses on lower tax rates with minimal exemptions. Taxpayers who decide hastily may end up paying more tax than necessary. A careful side-by-side comparison using a tax calculator or consulting an advisor is essential before making the choice.
Claiming Deductions Not Allowed in the New Tax Regime
The new regime does not permit many common deductions such as 80C investments, 80D health insurance, or exemptions like HRA and LTA. However, taxpayers often mistakenly claim these, leading to discrepancies in return filings. Such errors can trigger income tax notices and penalties. It is important to be fully aware of the deductions allowed under the chosen regime to avoid unnecessary complications.
Ignoring Long-term Tax Implications When Selecting a Regime
Many individuals focus only on immediate tax savings while selecting a regime, ignoring how the choice impacts long-term financial planning. The old regime supports savings-oriented investments, while the new regime benefits those with fewer deductions but stable income. Future goals such as retirement, buying property, or funding education must also be factored in while choosing the right regime.
Not Informing the Employer About Tax Regime Choice
Employees are required to inform their employer about the preferred tax regime at the beginning of the financial year. If no intimation is given, the employer defaults to the new regime under Section 115BAC, which may not align with the employee’s tax-saving strategies. Timely communication ensures correct TDS deductions and prevents mismatches when filing the return.
Incorrect or Incomplete Bank Account Details in ITR
Refunds are directly credited to the bank account provided in the ITR. Entering incorrect account numbers, inactive accounts, or accounts not linked to PAN can delay refunds or cause them to fail altogether. Before filing, it is crucial to verify that the details are correct, updated, and linked to the taxpayer’s PAN and Aadhaar.
Failing to Declare All Sources of Income
Not disclosing interest income from savings accounts, fixed deposits, rental income, or capital gains is another common mistake. Undisclosed income can result in scrutiny, penalties, and notices from the Income Tax Department. Complete and transparent reporting of income ensures accurate tax computation and compliance.
Choosing the Wrong ITR Form Linked to the Tax Regime
Selecting the correct ITR form is linked directly to the type of income and the regime chosen. For example, salaried individuals typically use ITR-1 or ITR-2, while those with business income or capital gains must use ITR-3 or ITR-4. Filing with the wrong form may lead to rejection of the return and further complications.
How to Decide Between Old and New Tax Regimes Based on Income and Investments
The decision depends on income structure and eligible deductions. Taxpayers with substantial investments in provident funds, insurance, or home loans generally benefit from the old regime. Those without major deductions or exemptions may find the new regime more favorable due to its simplified lower tax rates. Running a comparison calculation before filing helps in making the right choice.
What Deductions and Exemptions Are Not Allowed in the New Tax Regime?
Under the new tax regime, several deductions are not available. These include Section 80C investments (like PPF, ELSS, life insurance), Section 80D health insurance premiums, HRA, LTA, and deductions for housing loan interest on self-occupied property. The only few benefits retained are contributions to the NPS (employer contribution under 80CCD(2)) and deductions for EPF. Taxpayers must be cautious not to claim disallowed deductions.
Can Tax Regime Be Switched After the Financial Year Ends?
Individuals with salary income can switch regimes every year at the time of filing their ITR. However, those with business or professional income are allowed to switch only once, after which the chosen regime becomes binding. It is important to evaluate carefully before making a decision, as switching rules differ based on the taxpayer category.
Steps to Inform Employer About Tax Regime Choice
Employees can inform their employer at the start of the financial year through a declaration form or during investment proof submission. This ensures TDS is deducted as per the chosen regime. If the employee fails to provide intimation, the employer applies the default new regime. This declaration is not permanent, as employees can still switch regimes at the time of filing the return.
Impact of Tax Regime Choice on Correct ITR Form Selection
The choice of regime directly impacts the ITR form that needs to be used. For example, a salaried taxpayer with no business income can file using ITR-1 or ITR-2, but if deductions under the old regime are claimed, a mismatch can occur if the wrong form is chosen. Businesses or professionals need to opt for ITR-3 or ITR-4 depending on income and regime choice. Ensuring the right form prevents rejection and speeds up processing.
Conclusion
Avoiding mistakes such as overlooking comparisons, claiming ineligible deductions, or not declaring income sources is crucial for smooth tax compliance. Each regime has its benefits depending on the taxpayer’s profile, but the choice must align with both current and long-term financial goals. For assistance in comparing regimes, optimizing tax liability, and ensuring accurate filing, downloading the TaxBuddy mobile app provides a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy provides both self-filing and expert-assisted plans. Taxpayers who prefer to handle their returns independently can use the self-filing option with guided steps and AI-driven error checks. For those who need professional support, expert-assisted plans allow certified tax experts to review, prepare, and file the return, ensuring accuracy and compliance. This flexibility caters to different levels of comfort and expertise in tax filing.
Q2. Which is the best site to file ITR?
The official Income Tax Department e-filing portal is the primary site for filing returns. However, taxpayers often prefer using platforms like TaxBuddy because of the added benefits such as AI-powered error detection, regime comparison tools, and post-filing support. Choosing a platform depends on ease of use, accuracy, and the availability of expert guidance, especially for complex cases involving capital gains, F&O trading, or multiple income sources.
Q3. Where to file an income tax return?
An income tax return can be filed online through the government’s e-filing portal or through authorized tax filing platforms such as TaxBuddy. While the government portal provides the basic infrastructure, professional platforms add features like simplified dashboards, automated form-filling, and expert review, making the process easier and reducing the chances of mistakes.
Q4. Can I switch from the new tax regime to the old one after filing my ITR?
Switching regimes after filing the ITR is not generally allowed for that financial year. Salaried taxpayers have the flexibility to choose between regimes every year before filing, but once the return is filed, the choice is locked in for that year. Business and professional taxpayers, however, can switch only once, and after opting out of a regime, they are bound to continue with the other for subsequent years unless specific conditions are met.
Q5. What happens if I claim deductions not allowed under my chosen tax regime?
Claiming deductions that are not permitted under the selected regime may result in disallowance during processing of the return. This could lead to notices, additional tax liability, and penalties for incorrect reporting. For example, claiming Section 80C or HRA under the new tax regime would be disallowed, which could delay refunds and create compliance issues.
Q6. Is informing my employer about my tax regime mandatory?
Yes, employees must inform their employer about their chosen tax regime at the start of the financial year. This allows the employer to deduct TDS correctly from the salary. If no intimation is provided, the employer defaults to the new tax regime under Section 115BAC. Even though this declaration affects TDS, the final choice can still be made while filing the return.
Q7. Are capital gains taxed differently under each tax regime?
Capital gains taxation remains the same under both regimes. Short-term and long-term capital gains on assets such as equities, property, and mutual funds are taxed at specified rates, independent of the chosen regime. However, the treatment of deductions or exemptions that may reduce taxable income differs between regimes, which can indirectly influence the overall liability.
Q8. How can I ensure my refund is credited on time?
To ensure timely refunds, taxpayers must provide correct and active bank account details in their ITR. The account should be linked to PAN and Aadhaar, and pre-validated on the e-filing portal. Mistakes such as entering old account numbers or inactive accounts often cause refund delays. Filing accurately and verifying the return also helps speed up processing.
Q9. What are the benefits of using a tax calculator before choosing a regime?
A tax calculator provides side-by-side comparisons of tax liability under both regimes. It takes into account income, deductions, and exemptions, giving a clear picture of which regime results in lower tax payable. This prevents guesswork and helps in making an informed decision, especially for salaried taxpayers with multiple deductions or business owners evaluating long-term tax strategies.
Q10. Does the choice of regime affect HRA, LTA, and standard deduction benefits?
Yes, the choice of regime directly affects these benefits. Under the old regime, taxpayers can claim HRA, LTA, and deductions under Section 80C and 80D, along with the standard deduction. In the new regime, most of these benefits are not available, although the standard deduction has been retained in recent updates. Understanding which benefits apply under each regime is essential to avoid filing errors.
Q11. Which ITR form should be filed under the old vs new regime?
The choice of regime does not change the type of ITR form itself, but income sources do. For instance, salaried individuals with no business income typically use ITR-1 or ITR-2. Business owners or professionals use ITR-3 or ITR-4. The selected regime determines whether deductions can be claimed in these forms. Filing with the wrong form can lead to rejection or notices.
Q12. How can TaxBuddy help in comparing old and new regimes before filing?
TaxBuddy offers built-in tools that calculate tax liability under both the old and new regimes, helping taxpayers identify which option is more beneficial. It also provides personalised insights based on income type, deductions, and financial goals. With expert-assisted filing, tax professionals guide users through regime selection and filing, ensuring error-free compliance and optimised tax savings.
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