The new tax regime for business owners has changed how many entrepreneurs and self-employed professionals approach their taxes. Since the regime was revamped in the Union Budget 2023, it has become the default option for individuals, including those running businesses. But does it actually work in your favour? And what should you consider before choosing it?
This guide breaks it down in plain language. Whether you run a sole proprietorship, a small business, or work as a freelancer, understanding how the new regime affects your tax liability is essential. Most importantly, your tax structure can directly influence how much money you retain, invest, and grow over the long term.
What Is the New Tax Regime and Who Does It Apply To?
The new tax regime is a simpler way to calculate and pay income tax. It offers lower tax slab rates compared to the old regime, but removes most of the popular deductions and exemptions that taxpayers have relied on for years.
For business owners and self-employed professionals, this can include sole proprietors, freelancers, and professionals such as doctors, architects, and consultants who report income under the head “Profits and Gains of Business or Profession.”
New Tax Regime Slab Rates for FY 2025-26
| Income Slab | New Regime Tax Rate |
|---|---|
| Up to Rs 4,00,000 | Nil |
| Rs 4,00,001 to Rs 8,00,000 | 5% |
| Rs 8,00,001 to Rs 12,00,000 | 10% |
| Rs 12,00,001 to Rs 16,00,000 | 15% |
| Rs 16,00,001 to Rs 20,00,000 | 20% |
| Rs 20,00,001 to Rs 24,00,000 | 25% |
| Above Rs 24,00,000 | 30% |
For FY 2025-26, the Section 87A rebate under the new regime has also been increased to up to Rs 60,000 for eligible resident individuals with total income up to Rs 12 lakh, subject to the applicable conditions. The Rs 75,000 standard deduction continues to be available to salaried individuals and pensioners, but it does not apply to income from business or profession.wever, this does not apply to business income. Business owners do not get the standard deduction benefit.
Key Deductions You Give Up in the New Tax Regime
This is one of the most important things for business owners and self-employed professionals to understand. When you opt for the new regime, several personal deductions and exemptions that could reduce your taxable income are no longer available.
Here are some commonly used deductions and exemptions that you generally cannot claim under the new tax regime:
- Section 80C deductions of up to Rs. 1.5 lakh, including eligible investments such as PPF, ELSS, life insurance premiums, and home loan principal
- Section 80D: health insurance premium deduction
- Section 80TTA: savings account interest deduction
- HRA exemption, where applicable
- LTA exemption
- Interest on a housing loan under Section 24(b) for a self-occupied property
- Section 80CCD(1B): additional NPS self-contribution deduction of Rs. 50,000
However, the new regime does not prevent business owners from claiming legitimate expenses incurred for earning business or professional income. These may include depreciation, office rent, employee salaries, business-related travel, professional fees, utilities, and interest on eligible business loans, subject to the applicable provisions of the Income Tax Act.
What Business Owners Can Still Claim
- Depreciation on eligible business assets
- Business-related travel and conveyance expenses
- Office rent and utilities
- Employee salaries and wages
- Professional fees paid for business purposes
- Interest on eligible business loans
- Other legitimate expenses incurred wholly and exclusively for business or profession
In addition, certain specific deductions can continue under the new regime, such as eligible employer contributions to NPS under Section 80CCD(2). The key distinction is that genuine business expenses used to compute business income generally continue to be deductible, while most personal investment-linked deductions and exemptions are not available under the new regime.
New Tax Regime vs Old Tax Regime: Which Suits Business Owners Better?
This is a question without a single answer. The right regime depends on your income level, eligible deductions, and overall financial situation. Let us look at a practical example.
Practical Example: Rahul, a Freelance Graphic Designer in Pune
Rahul earns a taxable business income of Rs. 12 lakh from his freelance business in FY 2025-26. He pays Rs. 25,000 annually as health insurance premiums, invests Rs. 1.5 lakh in PPF and ELSS, and pays Rs. 1.5 lakh as interest on a home loan for a self-occupied property.
| Particulars | Old Regime (Rs) | New Regime (Rs) |
|---|---|---|
| Taxable Business Income | 12,00,000 | 12,00,000 |
| Section 80C | 1,50,000 | Not available |
| Section 80D | 25,000 | Not available |
| Section 24(b) Home Loan Interest | 1,50,000 | Not available |
| Taxable Income | 8,75,000 | 12,00,000 |
| Approximate Tax Before Rebate | Rs. 92,500 | Rs. 60,000 |
| Section 87A Rebate | Not applicable | Rs. 60,000 |
| Tax Payable Before Cess | Rs. 92,500 | Nil |
In Rahul’s case, the new regime results in lower tax because his taxable income is within the Rs. 12 lakh threshold for the Section 87A rebate, assuming he meets all eligibility conditions. The old regime allows his deductions, but its higher slab rates result in a higher tax liability in this example.
If Rahul’s income were higher than Rs. 12 lakh, or if his income included special-rate income that does not qualify for the rebate, the comparison could change.
Therefore, business owners should compare both regimes using their actual taxable income and eligible deductions rather than relying on a general rule.
The One-Time Switch Rule: Business Owners, Pay Attention
Here is a rule that catches many business owners off guard. If you have income from business or profession, your ability to switch between the old and new tax regimes is more restricted than it is for salaried individuals.
The new tax regime is the default. If you want to claim deductions available only under the old regime, you generally need to opt out of the new regime by filing Form 10-IEA within the prescribed time. Once you opt for the old regime, you cannot switch between the two regimes freely every year like a taxpayer without business or professional income.
Key Points on Regime Switching for Business Owners
- The new regime is the default regime.
- To opt out of the new regime, eligible taxpayers with business or professional income generally need to file Form 10-IEA within the prescribed deadline.
- The option to choose the old regime is subject to specific conditions and restrictions.
- If you later want to return to the new regime, the Income Tax Rules impose conditions on when and how that re-entry can take place.
- Therefore, business owners should not treat the regime choice as an annual decision that can be changed freely.
Because the switching rules for business and professional income are more restrictive, it is important to compare your tax liability under both regimes before filing Form 10-IEA. If the calculation is complex, consider taking advice from a qualified tax professional before making the choice.
How the New Tax Regime Affects Your Investment Planning
This is where many business owners overlook an important connection. Tax saving and investment planning have traditionally gone hand in hand. Section 80C, for example, encouraged many people to invest in ELSS mutual funds, PPF, and other eligible instruments. Under the new regime, most of these personal deduction-based incentives are no longer available.
Without the need to make investments purely for claiming deductions, you may have more cash available. But extra cash only helps if you put it to productive use. If it simply sits in a savings account, you may miss the opportunity to build long-term wealth.
A Smarter Way to Think About It
Under the new regime, the question shifts from “Which tax-saving instrument should I invest in?” to “What investment best suits my actual financial goals?”
This can be a healthier approach to financial planning. It means you are investing because the investment fits your goals, time horizon, and risk appetite, rather than primarily because it provides a tax deduction.
For example, if you are a 35-year-old business owner with a 20-year investment horizon, an ELSS fund with a three-year lock-in may not automatically be the best choice simply because of its tax-saving feature. Depending on your goals and risk profile, a diversified equity mutual fund without a lock-in could be more appropriate. The new regime gives you greater flexibility to evaluate investments on their actual merits rather than purely for tax benefits.
This is also where personalised financial planning can add value. At VSJ FinMart, we help business owners connect their surplus cash with investment plans based on their actual goals, time horizon, and risk appetite, rather than simply following a tax-saving checklist.
Practical Steps for Business Owners Before Filing Returns
Before you file your income tax return for the year, here are some steps every business owner should go through:
- Calculate your taxable business or professional income after accounting for all legitimate business expenses and applicable deductions.
- List the personal deductions you would be eligible to claim under the old regime.
- Compare your tax liability under both regimes using your actual income and eligible deductions.
- Check whether you have previously exercised the regime option, because taxpayers with business or professional income face restrictions on switching between regimes.
- File Form 10-IEA within the prescribed deadline if you want to opt out of the new regime and choose the old regime.
- Plan your investments for the year based on your financial goals, cash flow, and tax position, rather than investing only to claim deductions.
These steps sound simple, but many business owners skip the comparison entirely and may end up choosing a regime that results in a higher tax liability than necessary.
Common Mistakes to Avoid
- Assuming the new regime is always better simply because it has lower slab rates
- Not accounting for deductions available under the old regime
- Ignoring the restrictions that apply when switching regimes with business or professional income
- Treating tax planning and investment planning as completely separate activities
- Not filing Form 10-IEA within the prescribed deadline when opting for the old regime
Advance Tax and Presumptive Taxation: Two More Things to Know
Business owners also need to factor in advance tax. If your estimated tax liability for the year is Rs 10,000 or more, you are generally required to pay advance tax in four instalments during the year: June, September, December, and March.
This applies regardless of which tax regime you choose. Failing to pay advance tax on time can result in interest under Sections 234B and 234C.
Presumptive Taxation Scheme
If you run a small business, you may be eligible for the Presumptive Taxation Scheme under Section 44AD. Under this scheme, taxable income is generally presumed to be 8% of eligible turnover or gross receipts, or 6% for eligible receipts received through specified digital modes. You are not required to maintain detailed books of accounts in the same manner as under the regular taxation system, subject to the applicable conditions.
The scheme can be used irrespective of whether you choose the old or new tax regime, subject to eligibility. For FY 2025-26, the turnover limit under Section 44AD is Rs 3 crore where cash receipts do not exceed 5% of total turnover or gross receipts. Otherwise, the general limit is Rs 2 crore.
Professionals such as doctors, lawyers, architects, and certain other specified professionals may instead be covered under Section 44ADA. The threshold is Rs 75 lakh where cash receipts do not exceed 5% of total gross receipts, and Rs 50 lakh otherwise.
Both schemes have specific eligibility conditions, so consult a qualified tax professional to determine whether presumptive taxation is appropriate for your business or profession.
Making Your Money Work After Taxes
Filing taxes correctly is only half the job. The other half is what you do with the money left over. Many business owners reinvest most of their surplus back into the business, which is natural during the growth stage. However, as the business becomes more stable, building a separate personal investment portfolio can become an important part of long-term financial planning.
A diversified portfolio that may include equity mutual funds, debt-oriented investments, and liquid or short-term investments can help balance wealth creation with liquidity needs. Your investment mix should depend on your income stability, business cycle, personal goals, investment horizon, and risk tolerance, rather than what is trending or what someone else recommends.
Final Words
The new tax regime for business owners is not universally better or worse than the old regime. It is a practical trade-off: lower slab rates in exchange for fewer personal deductions and exemptions. For some business owners, especially those with limited personal deductions, the new regime may result in lower taxes. For others who can claim significant deductions under the old regime, the old regime may still make more sense.
The most important thing is to calculate your numbers every year before filing, understand the restrictions on switching between business and professional income regimes, and align your tax planning with your broader investment strategy. Do not let tax season be the only time you think about your finances.
Frequently Asked Questions
Can a business owner switch from the new tax regime to the old regime every year?
No. Taxpayers with business or professional income have restrictions on switching between the two regimes and cannot change regimes freely every year like taxpayers without business income. If you opt out of the new regime and choose the old regime, the rules governing a subsequent return to the new regime still apply. This makes the initial decision important.
Are business expenses still deductible under the new tax regime?
Yes. Expenses directly related to running your business, such as rent, salaries, depreciation, business-related travel, and professional fees, can generally remain deductible under the applicable provisions. What you generally lose are personal investment-linked deductions under Chapter VI-A, such as 80C and 80D.
What is Form 10-IEA and when should I file it?
Form 10-IEA is the form generally required for taxpayers with business or professional income who want to opt out of the new tax regime and choose the old regime. It must be furnished within the prescribed time, generally by the due date for filing the Income Tax Return for the relevant financial year. Check the applicable filing requirements for your situation before submitting your return.
Does the rebate under Section 87A apply to business owners under the new regime?
Yes, eligible resident individual business owners can claim the Section 87A rebate under the new regime. For FY 2025-26, the rebate can be up to Rs. 60,000 where taxable income does not exceed Rs. 12 lakh, subject to the applicable conditions. This can effectively reduce the tax liability to zero for eligible taxpayers within this income limit.
How does choosing a tax regime affect my investment planning?
Under the old regime, certain investments such as ELSS and PPF can qualify for deductions under Section 80C. Under the new regime, these deductions are generally not available, so investment decisions can be based more on your goals, investment horizon, liquidity needs, and risk profile rather than tax-saving requirements. This can encourage a more goal-focused approach to long-term wealth building.
Disclaimer
The information provided in this blog is for educational and informational purposes only and should not be construed as investment advice. Please consult a qualified financial advisor before making any investment decisions. Shashikant Chanderkumar Mudaliar (ARN: 319377), operating under the brand name VSJ FinMart, is an AMFI-registered Mutual Fund Distributor (MFD) and does not provide investment advisory services. Mutual fund investments are subject to market risks. Past performance is not indicative of future results. Please read all scheme-related documents carefully before investing. Registration details can be verified at www.amfiindia.com/locate-distributor.