Earning under ₹12 lakh doesn’t guarantee zero tax for professionals — CA explains hidden tax rule

For individual taxpayers, the new Income-Tax regime’s ₹12 lakh tax-free threshold is a welcome relief, but for business owners and professionals, it can be deceptive. Falling below this income limit does not guarantee zero tax liability.

Ankit Gupta, chartered accountant and managing partner at Ankit Mahesh Gupta & Associates, told Mint that the applicable tax regime, the nature of income and, importantly, compliance with the prescribed procedure — all determine the final tax outcome.

The new tax regime is the default regime.

Gupta noted that for taxpayers earning only a 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.”

However, for individuals with business or professional income, the rules are different. For them, Gupta said, opting out of the default new regime, or subsequently returning to it, involves a specific compliance process.

“They cannot move freely between the two regimes year after year,” the CA said, highlighting that 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

Ankit Gupta told Mint that, for a business or professional taxpayer, switching to the old regime while filing the income-tax return is not as simple as ticking a box. “Form 10-IEA must also be furnished within the prescribed time to exercise the option validly,” he said, adding that this will also be required for the taxpayers who want to return to the new regime.

Otherwise, Gupta said, the tax department will compute the liability under the default regime. “Failing to follow the prescribed process can result in the department not accepting the intended regime.”

Sharing an example, Gupta said that one of his clients reported a total income of ₹11,75,590, which is well below the ₹12 lakh threshold. The taxpayer filed his return within the applicable due date, and there was no apparent arithmetic error. However, he said, an intimation under Section 143(1) resulted in a tax demand of ₹1,82,740.

Upon examining the return, his firm found that the taxpayer had selected the new tax regime but had not furnished Form 10-IEA, as a result of which it was processed under the old regime.

Fortunately, he said, the intimation came before the applicable deadline of 31 August, allowing the firm 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.”

Look beyond immediate savings

Gupta said that for individuals with business or professional income, tax regime selection demands careful precision—both for statutory compliance and multi-year 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.”

Rather than simply choosing the regime that minimises their tax liability in the current assessment year, he suggested that taxpayers assess their projected earnings and financial trajectory over several years.

What happens when income profile changes?

Using the example of an independent consultant who operates as a freelancer from April to July, takes up salaried employment from August to December, and returns to consulting in January, Gupta said that even if salary represents a major share of their annual earnings, the presence of professional income changes their tax standing.

Such individuals cannot assume that standard rules for purely salaried employees apply to them:

• Form 10-IEA applicability: Earning any business or professional income during the financial year means the Form 10-IEA rules come into effect.
• Hybrid careers: The same scrutiny applies to any professional transitioning between regular employment and independent practice within the same financial year.

Compliance mandate

For business owners and independent professionals, selecting a tax regime is a strategic decision tied to mandatory procedural requirements.

“If you have business or professional income and choose to opt for the old tax regime, checking the box on your ITR is not enough. You must also formally submit Form 10-IEA before August 31,” Gupta said. “A small compliance lapse can otherwise turn an apparently tax-free income into an unexpected tax demand.”