TDS on salary under new or old tax regime: Government clarifies

The apex income tax policy-making body, the Central Board of Direct Taxes, has come out with a detailed clarification on the deduction of TDS under the new tax regime.  CBDT in its circular dated April 13, 2020 clarified that the employers will be allowed to deduct taxes on salaries paid to employees from the beginning of a financial year on the basis of  individual’s choice of opting for the old or the new taxation regime through a declaration. The new tax regime is optional for the taxpayers. An individual who is currently availing deductions and exemptions under the Income Tax Act may choose to avail them and continue to pay tax as per the old regime.

The Board circular dated April 13, 2020, clarifies that “an employee having income other than the income under the head of ‘profit and gains of business or profession’ and intending to opt for the concessional rate under section 115BAC of the Act, may intimate the employer, of such intention for each previous year and upon such intimation”. Upon receipt of such intimation, the employer shall compute his employee’s total income, and make TDS thereon in accordance with the provisions of section 115BAC of the Act. If there is no intimation from the employee, then the employer will deduct tax (TDS) according to the old regime. Earlier to the above clarification of CBDT, employers were required to deduct TDS (tax deducted at sources) only under the old regime, which could have resulted in mismatch between TDS and ITR. However, the intimation given to employer for deduction under new tax regime does not prohibit an employee from changing his option at the time of filing the tax returns for that year.

Budget 2020-21 has proposed a new lower income tax rate regime which is optional in nature. A new Section 115 BAC being introduced to income tax act whereby an individual and HUF can opt to pay tax as per new tax rates in case he/she is ready to forgo all exemptions and deductions. Individuals opting to pay tax under the new lower personal income tax regime will have to forgo almost all tax breaks they were claiming in the current tax structure. The important tax breaks that will not be available under the new regime include Section 80C (Investments in PF, NPS, Life insurance premium), Section 80D (medical insurance premium), tax breaks on HRA, interest deduction on Home loan under section 24(b) in respect of self-occupied house, deduction under section 57(ii a) of 1/3rd of Family Pension, minor income exemption under section 10(32).  The tax breaks for the disabled and for charitable donations will also go. The deductions and exemptions one will have to forgo if he/she opts for new income tax structure are listed in the ,