CBDT Clarification on TDS from Salary under New Tax Regime
CBDT Clarification on TDS from Salary under New Tax Regime
The Central Board of Direct Taxes (CBDT) recently issued Circular 4/2023 on 5th April 2023. This circular aims to clarify the deduction of Tax Deducted at Source (TDS) under Section 192 of the Income-tax Act, 1961, in conjunction with sub-section (IA) of Section 115BAC of the Income Tax Act. Circular No. C1 of 2020, issued on 13th April 2020, has been superseded by this new circular. The provisions of Circular 4/2023 are applicable for TDS during the financial year 2023-24 and subsequent years. This article provides an in-depth overview of the recent CBDT clarification on Tax Deducted at Source (TDS) from salary under the new tax regime.
TDS on Salary
Employers are responsible for deducting taxes from an employee’s salary before disbursing it into their account. This process is commonly known as Tax Deduction at Source (TDS). Section 192 of the Income Tax Act, 1961, addresses explicitly the provisions related to TDS on salary.
Who can Deduct TDS under Section 192?
Under Section 192, various entities can deduct TDS from an employee’s salary. These entities include:
- Companies (both private and public)
- Individuals
- Hindu Undivided Families (HUF)
- Trusts
- Partnership firms
- Cooperative societies
Regardless of the employer’s status, whether it is a HUF, firm, or company, what matters for the TDS deduction under this section is an employer-employee relationship.
- As per Section 192 of the Income Tax Act, the deductor and deductee must have an employer-employee relationship for TDS to be deducted.
- The number of employees employed by the employer is also irrelevant to the TDS deduction.
- Each employer must deduct TDS monthly and remit it to the government within the specified period.
New Tax Regime under Section 115BAC of the Income-tax Act, 1961
The Finance Act of 2023 has introduced a new tax regime that came into effect from the assessment year commencing on or after 1st April 2024. This regime applies to the following persons:
- Individuals
- Hindu undivided families
- Associations of persons (excluding cooperative societies)
- Bodies of individuals (both incorporated and unincorporated)
- Artificial juridical persons
Under this new regime, the individual’s total income will be taxed based on the rates specified in sub-section (1A) of Section 115BAC, subject to certain conditions. These conditions include thenon-utilization of specified exemptions and deductions.
Section 115BAC of the Income Tax Act: Option for Taxation and Conditions
Section 115BAC of the Income-tax Act, 1961 introduces the provision that individuals or undivided Hindu families (HUF) with income other than from profession or business can choose to be taxed under this section. This option can be exercised for a particular previous year and must be indicated while filing the income tax return under Section 139(1) of the Income-tax Act each year.
However, the concessional tax rate provided under Section 115BAC is subject to certain conditions. These conditions require that the total income be computed without considering specified exemptions or deductions, loss set-off, and additional depreciation.
Opting for Tax Regime and Calculation of Tax Deduction by Employer
Starting from 2023-24, the new tax regime is considered the default tax regime, and tax calculations will be based on the rates provided in the new regime. However, if you prefer the old tax regime, you must inform your employer about your choice during the investment declaration process. You can choose between the old and new tax regimes each year. Your employer will deduct income tax accordingly, depending on the tax regime selected.
It is important to note that if you have opted for the new tax regime, the Income Tax Act does not allow most of the exemptions and deductions available in the old tax regime. Therefore, your employer will calculate the net taxable income based on your chosen income tax regime.
Opting Out of the New Tax Regime
As mentioned above, The new tax regime automatically applies to individuals, Hindu undivided families, associations of persons (excluding cooperative societies), bodies of individuals (both incorporated and unincorporated), and artificial juridical persons. However, individuals (without income from business or profession) can opt out of this tax regime as per sub-section (6) of Section 115BAC of the Income-tax Act, 1961.
Concerns regarding TDS on Salary Income
Specific concerns have been raised regarding deducting Tax Deducted at Source (TDS) on salary income under Section 192 of the Income-tax Act. These concerns arise from employers (deductors) needing to be made aware of an employee’s intention to opt out of the taxation under sub-section (1A) of Section 115BAC of the Act.
Intimation of Intended Tax Regime by Employees
To address this issue and prevent hardship for employees, the CBDT has directed employers to seek information from each employee regarding their intended tax regime. Employees must inform their employers about their chosen tax regime for each year. Based on this information, employers will calculate the employee’s total income and deduct TDS accordingly.
The presumption in the Case of No Intimation
If an employee fails to provide any intimation, it will be presumed that they are continuing in the default tax regime and have not opted out of the new tax regime. In such cases, the employer will deduct TDS on the employee’s income under Section 192, based on the rates specified in sub-section (1A) of Section 115BAC.
Final Clarification
It is important to note that the intimation of the intended tax regime by the employee is separate from the formal exercise of the option under sub-section (6) of Section 115BAC. The employee must separately exercise this option following the provisions of the sub-section.
Guidelines for Deduction of Income Tax from Salary Income – Section 192 of the Act
Under section 119 of the Act, the Central Board of Direct Taxes (CBDT) has issued guidelines for employers regarding deducting income tax from employees’ salary income under section 192. The guidelines are as follows:
- The employee must inform the employer about the chosen tax regime for each financial year.
- The employer will calculate the employee’s total income and liability based on the chosen tax regime.
- Suppose the employee fails to inform the employer about the tax regime option. In that case, the employer will deduct income tax from the salary income according to the new tax regime specified in section 115BAC(1A) of the Act.
- It’s important to note that employees can change their tax regime preference while filing their income tax returns. Employees who previously opted out of the new tax regime can choose it when filing their income return.
- This Circular supersedes the previous Circular No. C1 of 2020, dated 13.04.2020, was issued when the new tax regime under section 115BAC was initially introduced by the Finance Act 2020.
There is no prescribed format for intimating the tax regime option to the employer. Therefore, employers can collect such information from their employees according to their procedures.
In conclusion, CBDT Income Tax Circular 4/2023 provides clarification on TDS from salary under the new tax regime under Sections 192 and 115BAC of the Income-tax Act, 1961, addressing concerns related to TDS on salary income. Employers and employees are advised to follow the guidelines outlined in the circular to ensure a smooth and compliant TDS process.
CBDT Clarification on TDS from Salary under New Tax Regime