CBDT Clarification on Section 115BAC of Income Tax Act

The Finance Act 2020 has inserted a new

section 115BAC of Income Tax Act, wherein an individual gets an option to choose between the actual tax rates and the new concessional tax rates without considering prescribed exemptions or deductions. However, given the introduction of this new Section 115BAC, there had been a lack of clarity on whether an employer can review the new tax regime at the time of withholding taxes from salary. To address such queries, the Central Board of Direct Taxes (CBDT) vide Circular No.C1 of 2020 issued a clarification that an employer, based on intimation received from the individual employee, should compute the tax deduction at source (TDS) by considering the provision of Section 115BAC of income tax, as applicable.

Section 115BAC of Income Tax Act

The new

Section 115BAC of Income tax Act, 1961 provides that a person, being an individual or an undivided Hindu family (HUF) having income other than income from profession or business, may exercise the option concerning of a previous year to be taxed under the Section 115 BAC along with his/her return of income to be furnished under Section 139(1) of the Income-tax Act for each year. The concessional rate provided under section 115 BAC is subject to the condition that the total income needs to be computed without specified exemption or deduction, set off of a loss, and additional depreciation.

Key Points of the CBDT Clarifications on Section 115BAC

The Key points of the clarifications issued by CBDT regarding 115BAC of income tax act are as follows:

If the Taxpayer is an employee and he has income other than that received from the organization. He intends to get a concessional rate under Section 115 BAC should intimate the detector each previous year.
In case the employee fails to make the intimation, the employer shall make TDS without considering the provisions of Section 115 BAC.

The New optional Tax Regime

As per the Finance Act, 2020, a new optional tax regime is provided for individuals and HUF with modified tax slabs and rates. On satisfaction of prescribed conditions, an individual or HUF may opt to compute tax in respect of total income without considering prescribed exemptions or deductions, while filing his Income-tax return as per the new slab rates, instead of the existing tax regime. Know more about the

applicable tax rates for the Individuals and HUFs opting new Section 115 BAC

Withholding taxes from salary

It is worth noting that every employer responsible for payment of salary is required to withhold tax on such salary paid to their employees based on the rates in force for the financial year (FY) in which the payment is made. The rates for deducting income tax from income chargeable under the head ‘Salaries’ is the actual tax rates. Given this, there has been a lack of clarity on whether an employer can consider the new tax regime at the time of withholding taxes.

Intimation of Opting New Tax Regime by an Employee

In this regard, CBDT has clarified that a taxpayer having income need to intimate his employer regarding the intention of opting for a new tax regime at concessional rates without considering prescribed exemptions or deductions. Such intimation, once made by an employee, cannot be modified during the relevant financial year. Consequently, the employer would have to compute the total income and deduct TDS as per the new tax regime.

In case the employee does not make any intimation to the employer, then the employer would be required to compute total income and deduct TDS as per the old tax regime.
The intimation to the employer would not amount to exercising the option in terms of section 115BAC (5) of the Act. Thus, the option of filing the return during that period may be different from the intimation made by the employee to his employer for that particular financial year.

Section115BAC for Taxpayer having Business Income

Further, in case of Taxpayer having a business income, option once exercised would be applicable for all subsequent financial year and such taxpayers would have to intimate to the employer, as applicable. The intimation once made cannot be changed for the subsequent financial year except under prescribed circumstances.

Conclusion

The clarifications issued by CBDT on the 115BAC of income tax act clears the ambiguity on the role of the employer concerning the application of the new tax regime while computing TDS on salary. The notification will also mitigate any inconvenience and hardships for employees to claim refunds of excess taxes withheld (if any). Accordingly, in case of employees who intimate the employer to opt for new tax rates, the employer would be required to deduct TDS as per the new tax rates. The official notification of CDDT on clarification Clarification on Section 115 BAC of Income Tax Act is as follows:

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Frequently Asked Questions

Common questions about CBDT Clarification on Section 115BAC Income Tax Act.

Section 115BAC of the Income Tax Act, introduced in the Finance Act 2020, offers individuals and Hindu Undivided Families (HUFs) the option to pay tax at concessional rates without claiming specified exemptions or deductions. It provides an alternative tax regime with revised income tax slabs and rates.

Individuals and Hindu Undivided Families (HUFs) having income other than income from business or profession are eligible to opt for the concessional tax rates under Section 115BAC of the Income Tax Act.

An employee intending to opt for the concessional tax rates under Section 115BAC must intimate their employer about this choice before the start of each previous year. The intimation cannot be modified during the relevant financial year.

If an employee does not intimate their employer about opting for Section 115BAC, the employer will calculate tax deducted at source (TDS) without considering the provisions of Section 115BAC, following the existing tax regime.

No, once an employee has intimated their employer about opting for Section 115BAC, they cannot modify this intimation during the relevant financial year.

No, the intimation given to the employer regarding opting for Section 115BAC is not considered as exercising the option under Section 115BAC(5) of the Income Tax Act. The employee can still choose a different option while filing their return for that period.

For taxpayers having business income, the option once exercised under Section 115BAC will be applicable for all subsequent financial years. They must intimate their employer accordingly, and the intimation cannot be changed except under prescribed circumstances.

To opt for the concessional tax rates under Section 115BAC, the total income must be computed without specified exemptions or deductions, set-off of losses, and additional depreciation.

The Central Board of Direct Taxes (CBDT) issued a clarification on Section 115BAC to address the lack of clarity regarding the role of employers in computing tax deducted at source (TDS) when an employee opts for the new tax regime.

The CBDT clarification mitigates any inconvenience and hardships for employees in claiming refunds of excess taxes withheld. It also provides clarity to employers on computing TDS based on the employee's intimation regarding opting for the new tax regime under Section 115BAC.