4 things to know about TDS on your income before you opt for alternative income tax regime

An Income Tax Department circular released on April 13 gives the detailed guidelines as to how you as a tax-payer can opt for the alternative regime that promises lower taxes, but at a cost

Kumar Shankar Roy Apr 15, 2020

Income tax returnIn this year’s Budget, Finance Minister Nirmala Sitharaman had announced an alternative income tax regime that promised lower taxes if you forego exemptions and deductions, which can be claimed in the existing tax regime. As of now, you as an income taxpayer or tax assessee can choose between the two regimes and you opt for the one you want during income tax filing.

However, there was confusion as to how would a tax-payer, especially the salaried, could opt for the alternative regime. Since salaried people have tax deducted at source (TDS) obligations and this TDS accounts for a bulk of their tax dues, a tax deductor, being an employer, would not know if the employee would opt for the newer taxation scheme or not. An Income Tax Department circular released on April 13 gives the detailed guidelines as to how you as a tax-payer can opt for it. Here are four things you should definitely know.

1. The Income Tax department has said that an employer will have to deduct TDS for FY2020-21, from an employee’s salary on the basis of the new lower tax regime if the employee opts for it and informs the employer of the same decision. Thus, you will need to inform your employer/company that you want to avail of the alternative tax regime. The onus is on you.

Section 115BAC of the Income-tax Act, 1961 provides that a person, being an individual or a Hindu undivided family having income other than income from business or profession”, may exercise option in respect of a previous year to be taxed under the said section alongwith his return of income to be furnished under sub-section (I) of section 139 of the Act for each year. The concessional rate provided under section 115BAC of the Act is subject to the condition that the total income shall be computed without specified exemption or deduction, setoff of loss and additional depreciation.

2. If you do not inform your employer about opting for the alternative tax regime, which is most likely the case for many, then your employer shall make TDS without considering the provision of section 115BAC of the Income Tax Act. This virtually means that if you don’t inform, the employer can use the other tax regime and deduct income tax as applicable.

Under the alternative income tax regime, taxpayers will pay 10%, 15%, 20% and 25% for income between Rs 5-7.5 lakh, Rs 7.5-10 lakh, Rs 10-12.5 lakh and Rs 12.5-15 lakh, respectively. Under the old regime, there is no tax for income up to Rs 2.5 lakh, then there is 5% for income between Rs 2.5 lakh and Rs 5 lakh, 20% for income between Rs 5 lakh and Rs 10 lakh, and the top tax rate is 30% for income above Rs 10 lakh.

3. The Income Tax department has pointed out that once the alternative tax regime is opted by an individual at the start of the financial year, then such an option cannot be changed during the financial year as far as TDS deducted by the employer is concerned. This means once you agree to deduct TDS under the alternative tax structure, you can’t change your mind, say four months later in the year, and tell your employer to deduct TDS as per the older tax regime.

Those who opt for lower rates prescribed under Section 115BAC will have to lose upon benefits like HRA Exemption, LFA / LTA Exemption, Standard Deduction, Interest deduction for a self-occupied house, any deduction u/s Section 80C, 80CCD(1B), 80D, 80G; also loss from house property cannot be set off, etc. This is not an exhaustive list. There are more.

4. Does this mean once you opt for TDS as per alternative regime, you cannot go back to the old regime? No. You can, of course, change your tax regime during the time of income tax return (ITR) filing. Consider a person who has informed his/her employer of their preference for TDS as per the new regime. Thus, TDS is deducted for the whole of the financial year as per the new regime. After the financial year ends and ahead of income tax filing, the same person can go back to the older regime if it suits them. The TDS is only an estimate of tax dues that have been paid on your behalf. The actual tax dues are assessed only during income tax filing, and if you feel you will be a gainer in the older regime, you can very well file taxes as per the older norms.

“…option at the time of filing of return of income under sub-section (J) of section J 39 of the Act could be different from the intimation made by such employee to the employer for that previous year,” clarifies the Income Tax circular.

Read the Income Tax department circular here.

RupeeIQ take

It is clear that a taxpayer must prepare or have a good estimation of their yearly income and taxes in advance before submitting any declaration of TDS as per rates to the tax deductor like an employer. Once you give nod to the new regime, you can’t change it for the whole year in terms of TDS deductions. So, be sure before taking a step.

If you are not able to have a good idea of how your whole year income will pan out given the economic slowdown and salary cuts etc., don’t provide a declaration to your employer to deduct TDS under alternative regime now. Continue with the older tax regime. You can still opt for the best-suited regime at a later stage while filing ITR and claim a refund of TDS if applicable.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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