How to deduct TDS against salary under new rules from April? CBDT clarifies

Employees could now take home a higher portion of their salary, by intimating employers about migrating to the new tax regime, introduced in the Budget, beginning April — in line with the clarification issued by the tax department on Monday.

Clearing confusion related to tax deduction at source (TDS) by employers, the central board of direct taxes (CBDT) — in a circular — said employers could deduct TDS in accordance with the new optional tax regime at the time of paying salaries from the beginning of the financial year, reversing its earlier stance that the option may only be availed at the time of filing of the income tax returns (ITR). The move will help avoid instances of mismatch between TDS and income tax returns.

However, employees will have the option of reverting to the old regime at the time of filing their ITR, the circular states. Experts pointed out that the move would allow employees get some extra cash in hand amid the lockdown.

The Budget introduced an alternative taxation regime for individuals, allowing an option for lower tax rates, provided they don’t avail of certain exemptions/deductions otherwise available under the Income tax Act. Some of such exemptions/deductions are house rent allowance, interest on home loans, and investments made under Section 80C, 80D, 80CCD, etc. Shailesh Kumar, director at Nangia Andersen Consulting, said the circular will remove confusion among employers and also enable employees to opt for the scheme even at the time of TDS. 

“This will also ensure there is minimum mismatch in the TDS and ITR of an employee, if they adopt a consistent position while making the declaration to the employer and in their ITR, ,” said Kumar.

Rajat Mohan, partner at AMRG Associates, said the employees now have a right to intimate the employer regarding the lower deduction of tax in accordance with special rates of income tax. “The circular will come as a relief for many employees as it is expected to provide them a little extra cash in these difficult times of COVID.”

The circular also addresses the confusion that there cannot be a change in option by the employee during the year, coming as a relief for employers.

“Now it’s clear that the employee (only those not having income from business or profession) cannot change the option once exercised for the purposing of getting TDS deducted but can always change it at the time of filing the tax return. This was resulting in significant anxiety in the minds of the employers, Amit Maheshwari, Partner AKM Global.

Exemptions will be removed and the income between Rs 5 lakh and Rs 7.5 lakh will be taxed at 10 per cent down from current 20%, income between Rs 7.5 lakh and Rs 10 lakh will be taxed at 15% down from current 20%, and income between Rs 10 lakh and Rs 12.5 lakh will be taxed at 20% down from current 30%. Income between Rs 12.5 lakh and Rs 15 lakh will be taxed at 25% as against 30% now. Incomes above Rs 15 lakh in a financial year will continue to be taxed at 30%.