New tax regime? Why income below ₹12 lakh can still trigger a demand notice

The ₹ 12 lakh income tax threshold under the new tax regime has brought significant relief to individual taxpayers. However, for those earning income from a business or profession, this headline figure can sometimes create a false sense of security.

Simply having an income below ₹ 12 lakh does not automatically mean that no tax will be payable or that the taxpayer cannot receive a tax demand. The tax regime chosen, the nature of the income and, crucially, compliance with the prescribed procedure can all affect the final outcome.

The new tax regime is the default option. Taxpayers earning only a salary, interest or other non-business income generally have greater flexibility in choosing between the old and new regimes. They can usually select the regime that suits them each year while filing their income-tax return.

However, the rules are more restrictive for individuals who have business or professional income. Moving out of the default new regime, or returning to it later, requires compliance with a specific procedure. Such taxpayers also cannot freely switch between the two regimes every year. Once they opt for the old regime, they get only one opportunity to return to the new regime as long as they continue to earn business or professional income.

A taxpayer with business or professional income who wishes to opt out of the default new regime can choose the old regime while filing the income-tax return. However, merely selecting the old regime in the ITR is not sufficient. Form 10-IEA must also be furnished within the prescribed deadline to validly exercise the option. Otherwise, the tax department may calculate the liability under the default regime.

The same form applies when a taxpayer who previously chose the old regime wants to switch back to the new regime. Failure to complete the required compliance process could mean the intended tax regime is not accepted.

For taxpayers with business or professional income, selecting a tax regime requires careful planning—not just for immediate tax savings but also for future flexibility. A deduction that makes the old regime attractive in one year may not necessarily justify losing flexibility in subsequent years.

Consider a consultant who works independently from April to July, takes up salaried employment from August to December, and then returns to consulting from January. Although salary may account for a substantial part of the person's annual income, professional income has also been earned during the same financial year.

Such a taxpayer should not assume that the rules applicable to someone earning only salary will automatically apply. The existence of business or professional income means that the provisions relating to Form 10-IEA must also be carefully examined.

The same principle applies to professionals who move between salaried employment and independent practice during a financial year.

If you have business or professional income and have opted for the old tax regime while filing your ITR, make sure you also comply with the Form 10-IEA requirement, wherever applicable, before the prescribed deadline.