Govt needs to clarify how TDS from salary will work in new income tax regime: Experts

If an employee informs employer at the start of the financial year about opting for new tax regime, will he/she be allowed to switch to the existing regime during the year and vice versa? The new option may lead to higher deduction of taxes from t...

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To avoid the uneven TDS deduction from an employee's salary, clarity is required from the government on the same.
Budget 2020 has proposed a new lower income tax rate regime which is optional in nature. The option of lower income tax rates (sans tax-exemptions and deductions) under the new regime can be exercised by an individual at the time of filing of income tax return (ITR) as per the Finance Bill, 2020.

However, there is no clarity in the Finance Bill regarding the calculation and deduction of tax at source by the employer at the time of paying salary. If an employee informs his/her employer at the start of the financial year about opting for the proposed new tax regime, will he/she be allowed to switch to the existing tax regime during the year and vice versa?

Remember, individual taxpayers having no business income in a financial year have the option to choose between the existing tax regime and new one every financial year as per their convenience. How does an employer know in advance as to which tax rates to use to calculate each employee's estimated tax liability for the purpose of TDS? If the employee chooses at the start of the fiscal then TDS from his/her salary would be deducted as per the tax regime chosen.


If the individual changes his/her mind at the time of filing ITR, then he/she may have to claim large refunds or pay excess tax with interest for late payment in case of Advance tax, depending on whether there has been excess or less TDS. Further, it would be difficult for an individual to be able to judge which tax regime would suit him/her at the start of a fiscal because the type and amount of income during the year may vary from estimates.

Chartered accountant Naveen Wadhwa, DGM, Taxmann.com says, "The new section does not specify any time limit to opt for the new tax regime. The employees can decide to pay tax as per new scheme or old scheme at any time before filing of return of income. If any tax is found short at the time of filing of return of income, the employee shall be liable to pay the self-assessment tax."

The new option may lead to higher deduction of taxes from the employee's salary. Aarti Raote, Partner, Deloitte India says, "As per Finance Bill, an employee needs to exercise the option to adopt the simplified tax regime at the time of tax return filing. Employers have an obligation to deduct and deposit taxes on a monthly basis based on the remuneration of the employees. If the option for a simplified tax regime is exercised only at the time of tax filing, the employee would suffer a higher tax deduction through the year and would need to wait for the tax refund post filing of the return. While the memorandum does mention deducting of tax at the proposed income tax rates at the time of salary payment, the Finance Bill lacks specific provisions to this effect and hence a clarification is necessary as to whether the option of opting for the new tax regime can be exercised at the time of tax deduction and the process for the same."

Further, in case of shortfall of TDS from the employee's salary income, clarity is needed as to whether the employer will have to pay interest on the short deduction of tax.

Abhishek Soni, CEO & founder, Tax2win.in, an ITR filing website says, "The employer has to deduct TDS at the time of payment of salary. There is no clarity in the Finance Bill as to how the TDS will be deducted by the employer in case an employee opts for the new tax regime. Suppose at the beginning of the financial year, an employee chooses existing tax regime and communicates the same to the employer. Accordingly, the employer deducted TDS throughout the fiscal year but at the time of submission of actual investment proofs (usually in month of January) employee changes his mind and opts for new tax regime. This may lead to liability of interest at the rate of one percent per month on employer for non - deduction /short deduction of TDS. A lot of confusions circles around the employer regarding the TDS, therefore, some clarifications are expected on the same from the CBDT."

Also, there is no clarity about what happens if an employee does not submit investment declaration at the start of the financial year. Currently, an employee is required to submit an investment declaration regarding the proposed investments that he/she will make during the financial year and according to which TDS liability is calculated by the employer. If an employer does not submit any investment declaration, then it is assumed no tax-saving investments are done by an employee which leads to higher TDS.

Soni says, "The Finance Bill does not clarify how an employer will deduct TDS in case an employee does not submit an investment declaration. At the start of the financial year, if there is no investment declaration, then will an employer deduct TDS as per existing tax regime or new proposed tax regime or calculate TDS in both regimes and choose the one which leads to lower/higher TDS. Changes in Form 12BB is expected in this regard."
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To avoid the uneven TDS deduction from an employee's salary, clarity is required from the government on the same.

Raote says, "The employer may face a challenge in case the employees' change their option frequently in a relevant financial year resulting in an uneven TDS deduction. Hence, clarity on the process, number of choices, deadline etc. for providing such a choice is required."
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