Employees will have to inform their employers about their intention to opt for the new optional tax regime to enable the latter to deduct TDS while paying salaries, says CBDT
In a circular dated 13 April 2020, Central Board of Direct Taxes (CBDT) clarified that employers can seek a declaration from employees and deduct tax at source (TDS) according to old tax regime or the new concessional tax rates, as opted by employee. According to Section 192 of the Income tax Act, 1961 every employer is mandatorily required to deduct tax while paying salary to the employee. Tax rate should be in line with the applicable income-tax slab. However, with dual income-tax slabs and rates available to the employees for financial year FY21, there was confusion on how tax should be deducted.
Under the old regime— there’s no tax for income up to ₹2.5 lakh, 5% for income between ₹2.5 lakh and ₹5 lakh, 20% for income between ₹5 lakh and ₹10 lakh, 30% for income above ₹10 lakh. Whereas, new regime has seven tax slabs—there’s no tax for income up to ₹2.5 lakh, 5% for income between ₹2.5 lakh and ₹5 lakh, 10% for income between ₹5 lakh and ₹7.5 lakh, 15% for income between ₹7.5 lakh and ₹10 lakh, 20% for income between ₹10 lakh and ₹12.5 lakh, 25% for income between ₹12.5 lakh and ₹15 lakh, and 30% for income above ₹15 lakh. Cess and surcharge continue to remain the same. It’s important to note that given the tax rebate of ₹12,500 individuals with taxable income upto ₹5 lakh don't have any tax liability under both the tax regimes.
If you are a salaried individual, you have the option to choose between the two slabs. However, there is catch with the new slab rates—you are not allowed to claim and deductions and exemptions available under different sections that help in bringing down the tax liability. To decide between the two systems, evaluate your benefits under both and accordingly make the declaration.
However, CBDT circular stated that employee’s declaration is independent of which tax slab (old or new) he or she chooses while filing the return. So, even if you make a declaration to your employer to deduct the TDS as per the new slab rates, you can still opt to file income tax return as per old tax regime.
